Investment Highlights

• We maintain BUY on MISC with an unchanged sum-of-parts based fair value of RM7.75/share, which reflects a premium of 3% from our 4-star ESG rating. This also implies an FY22F EV/EBITDA of 8x, 1 standard deviation below its 3-year average of 9x.

• Our forecasts are unchanged following an engagement session with MISC president/group CEO Datuk Yee Yang Chien yesterday. These are the salient highlights:
  • Management is cautiously optimistic on petroleum tanker rates, which have doubled YoY to US$11K/day for Suezmax and risen 76% YoY to US$8.8K/day for Aframax. However, very large crude carriers’ (VLCC) rates remained depressed, halved YoY at only US$6.7K/day.
    As 2021 would represent the worst-case scenario in which negative VLCC rates emerged in Jun–July this year, MISC expects some recovery in FY22F as OPEC+ is likely to raise production quotas in tandem with rising global consumption. Together with the addition of shuttle tankers (1 in 4QFY21 and 5 in FY22F), we expect breakeven in 4QFY21 from a 3QFY21 loss of RM8mil.
  • MISC was relatively subdued in bidding for new contracts this year as the group focused on the execution of its existing projects amid the Covid-19 pandemic’s uncertain impact.
    However, the company is now eyeing fresh contracts which include floating production storage and offloading (FPSO) projects that could cost US$1–2bil and liquefied natural gas carriers as rates have risen 62% YoY to US$128K/day.
  • FPSO tenders currently appear to be single-bidder propositions given the limited number of financially viable operators. Upstream reported that MISC is among the interested bidders for Petrobras’ P-81 FPSO to be contracted under a build-operate-transfer model at the Sergipe-Alagoas basin offshore Brazil.
    The vessel will have a processing capacity of 120,000 barrels of oil and 10mil cubic metres per day of natural gas, 33% smaller than the US$2bil Mero-3 (to be renamed Marechal Duque de Caxias) which has a processing capacity of 180,000 barrels of oil and 12mil cubic metres of gas per day
  • In line with Petronas’ ESG objectives, MISC aims to achieve net zero carbon neutrality by 2050. Hence, the group is eyeing prospective contracts requiring LNG vessels with dual-fuel capabilities, including a target to replace 50% of its fleet of 30 carriers by 2030.
  • While these dual-fuel vessels could cost an additional US$10–US$15mil each, management views that European charterers are willing to accept the higher charter rates given rising emissions restrictions. Additionally, management is jointly developing an ammonia-fuelled tanker together with Samsung Heavy Industries, Lloyd’s Register and Germany-based MAN Energy. In our view, these initiatives reaffirm our 4-star ESG rating for MISC.
  • Management expects a similar capex trend over the next 4–5 years as the 2017–2020 period which could mean US$1bil–US$1.5bil annually, depending on the type of vessels and their construction cycles. Hence, pending the announcement of new contracts, we maintain our FY22F–FY23F capex assumptions of US$1bil annually.
• Going forward, we expect modest improvement to petroleum tanker rates as OPEC+ plans to raise production levels by 2mil barrels from August to December 2021 amid the winter season, which is usually the peak tanker cycle. Together with the delivery of 6 dynamic positioning shuttle tankers and 2 VLCCs next year, this is expected to support FY22F earnings growth prospects.

• MISC currently trades at an attractive FY22F EV/EBITDA of 7x – 2 standard deviations below its 3-year average of 9x.

Source: AmInvest Research - 10 Dec 2021