Investment Highlights

• We downgrade our rating on MISC to HOLD from BUY with a lower sum-of-parts (SOP) based fair value of RM8.21/share (from an earlier RM8.32/share), which also reflects a premium of 3% from our 4-star ESG rating. This implies an FY22F EV/EBITDA of 10x, 1 standard deviation below its 2-year average of 9x.

• While awaiting an analyst briefing later today, we trim earnings for FY22F by 8% to factor in a lower share of profit from JVs and associates as well as higher finance costs. Subsequently, we slightly tweaked FY23–24F earnings.

• MISC’s 1QFY22 core net profit (CNP) of RM368mil came in below expectations at 18% of our earlier FY22F net profit and 19% of consensus estimates. 1QFY22 CNP fell 15% YoY and 17% QoQ, due to higher finance costs and a lower share of profit from JVs and associates as 4QFY21 benefited from charter extensions for FPSO Kikeh and Ruby II as well as FSO Puteri Dulang. MISC declared a first interim dividend of 7 sen (flat YoY), which is a higher dividend payout ratio of 83% versus 73% in 1QFY22.

• On a brighter note, marine and heavy engineering turned around to an EBIT of RM6.3mil from a RM101.9mil loss in 1QFY21 in tandem with a 20% revenue growth and a reversal of warranty provision for post sail-away heavy engineering projects and partial recovery of Covid-19 claims. Note that 1QFY21 was impacted by one-off additional costs provisions for ongoing heavy engineering projects.

• Turnover rose by 13% YoY on the back of better performance across all operating segments, particularly the marine and heavy engineering segment which recorded 20% growth against 1QFY21 stemming from higher activities for ongoing projects and increased dry-docking activities in the marine segment.

• Turnover declined a slight 7% QoQ owing to lower recognition of revenue from the conversion of the Mero 3 FPSO in the offshore business segment, partly cushioned by higher revenue in the petroleum & product shipping segment, which benefited from higher freight rates in the mid-sized tanker segment. The lower revenue recognition for the FPSO was largely within our expectations as management previously hinted that construction works are gradually progressing towards the ending phase.

• The gas assets and solutions segment remained the biggest earnings contributor at 76% of total EBIT in 1QFY22, followed by offshore business (23%) and the marine and heavy engineering segment (6%). The outlook for MISC remains promising backed by improved spot rates in the LNG shipping markets as well as the healthy demand for FPSOs amid elevated oil prices, with gas assets and solutions enjoying EBIT margin of 52% in 1QFY22. Additionally, spot prices for Aframax and Suezmax has experienced upturns from the Russia-Ukraine conflict.

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

Source: AmInvest Research - 26 May 2022