Investment Highlights

• We maintain BUY on MISC with a higher sum-of-parts-based fair value of RM8.32/share (from an earlier RM7.75/share), which reflects a premium of 3% from our 4-star ESG rating. This also implies an FY22F EV/EBITDA of 9x, at parity to its 3-year average.

• We have raised MISC’s earnings by 4% for FY22F and 7% for FY23F–FY24F on higher petroleum charter rate assumptions amid widening sanctions on Russia that could lead to traders securing alternative supplies outside the Black Sea region.

• While petroleum tanker freight rates soared for Russian-bound routes in the Black, Baltic and North seas, the impact on Arabian Gulf-Japan (AGJ) and Arabian Gulf-US Gulf (AUG) rates was milder. From mid-February this year, Worldscale AGJ rates surged 75% while AUG rose by 43% in early March after Russia invaded Ukraine on 24 February 2022. However, AGJ has since retreated by 33% points and AUG by 20% (Exhibit 7).

• Even so, we expect upward revisions to general tanker rates to other route regions outside of Russia and Europe to gather momentum if Russian crude oil exports are diverted to China or if Russian tanker owners are prevented from trading internationally.

• For now, the modest increase for rates the US Gulf CoastEurope and intra-Asia trades together with rising production quotas for OPEC continue to support our sanguine view on MISC’s petroleum division.

• In 4QFY21, spot accounted for 32% of the petroleum and chemical charters in which Aframax was 40%, Suezmax was 46% and very large crude carriers 18%. We estimate that a 10% increase in average day rates above our current assumptions could raise FY22F earnings by 4%.

• Meanwhile, the US has reached an agreement to supply 15bil cubic metres of liquefied natural gas (LNG) to the European Union this year to cut its dependency on Russian gas by two-thirds and end all Russian fossil fuel imports by 2027 following Russia's invasion of Ukraine. Russia supplies around 40% of Europe's gas needs.

• As only 4 of MISC’s fleet of 30 LNG tankers are considered on spot charters while the majority are on long-term, we estimate that a 10% increase in the LNG spot charter rate could raise the group’s FY22F earnings by only 1.8%, half of the impact from petroleum tankers.

• Going forward, we expect a modest improvement in petroleum tanker rates as OPEC+ plans to raise production levels, which are 700–800K barrels/day below agreed quotas currently. Together with the delivery of 6 dynamic positioning shuttle tankers and 2 VLCCs this year, this is expected to support FY22F earnings growth prospects.

• MISC currently trades at an attractive FY22F EV/EBITDA of 8x, 1 standard deviation below its 3-year average of 9x.

Source: AmInvest Research - 28 Mar 2022