Investment Highlights

• We maintain our HOLD recommendation on MISC with an unchanged sum-of-parts (SOP) based fair value of RM8.21/share, which also reflects a premium of 3% of our 4- star ESG rating. This implies an FY22F EV/EBITDA of 10x, 1 standard deviation above its 3-year average of 9x.

• Our forecasts are unchanged following an analyst briefing yesterday. These are the key takeaways:
  • In 1QFY22, the petroleum and chemical division posted a deteriorated average term-to-spot rate ratio to 65:35 from 71:29 in 4QFY21 mainly due to a decrease in very large crude carrier (VLCC) from 94:6 to 75:25, Suezmax from 72:28 to 58:42, as well as Aframax from 60:40 to 75:25. Spot rates for Suezmax and Aframax surged towards the end of 1QFY22 and are expected to remain robust in the short term mainly due to changes in the crude trade oil pattern arising from the Russia-Ukraine conflict which resulted in longer-haul routes. However, VLCC rates remain weak with largely depressed spot rates.
  • The US$2bil Mero 3 floating, production, storage and offloading vessel reached 40% completion progress by end-1QFY22 which is 3–4% behind schedule mainly due to global supply chain delays and recent lockdowns in parts of China. This affected the movement of project personnel, goods and services as well as for engineering, procurement and construction activities. Management did not rule out the possibility of an extension of the completion date as it is in the middle of negotiations with the client, Petrobras. MISC will focus on getting Mero 3 back on track while on the lookout for potential opportunities in targeted markets, including Latin America, Asia Pacific and Africa. Recall that Mero 3 is scheduled to commence operation in 2H2024.
  • For the liquefied natural gas (LNG) shipping operations, time charter contracts for 2 vessels are expected to expire in 4QFY22 but management hinted at a potential contract extension with Petronas. Furthermore, the contracts of 2 more vessels will also expire in 2023. LNG spot rates continued trending downward in 1QFY22 as Asian-bound cargoes were diverted to Europe due to the Russia-Ukraine conflict coupled with weaker LNG demand due to lockdowns in China.
• MISC currently trades at a fair FY22F EV/EBITDA of 10x, 1 standard deviation above its 3-year average of 9x.

Source: AmInvest Research - 27 May 2022