Investment Highlights

• We reiterate BUY on MISC with an unchanged sum-of-parts (SOP) based fair value of RM8.11/share, which also reflects a premium of 3% for our unchanged 4-star ESG rating. Our FV also implies an FY23F EV/EBITDA of 9x, at parity to its 3-year average of 9x.

• We maintain FY23F-FY24F earnings, which already factored in the improved outlook for liquefied natural gas (LNG) shipping and offshore business segments. We also introduced FY25F earnings with a steady growth of 8%, underpinned by the full year contribution of the Mero 3 charter.

• MISC’s FY22 core net profit (CNP) of RM2,128mil (stripping off RM560mil net impairment loss, RM230mil one-off compensation for contract renewal and RM31mil other exceptional gains) beat expectations, coming in above our forecasts by 22% and consensus estimates by 16%. We believe the positive variance was mainly due to the better-thanexpected profit margins from the LNG operations as well as higher progress billing for Mero 3.

• The group declared a fourth interim dividend of 12 sen, bringing FY22 dividend per share to 33 sen (flat YoY), as expected.

• YoY, the group’s FY22 revenue grew substantially by 30% to RM13.9bil on the back of higher freight rates and earning days in the petroleum & product shipping segment as well as improved progress billings from the conversion of floating, production, storage and offloading vessel (FPSO) Mero 3. In tandem with the higher revenue, FY22 CNP also rose by 21% YoY as a result of increased earnings contributions from all operating segments except for the offshore business.

• While the offshore business division recorded a higher FY22 revenue of RM4.3bil (+42% YoY), the segment’s operating profit contracted to RM666mil (-17% YoY), dragged by increased construction costs of Mero 3 arising from global supply chain disruptions and lockdowns in China.

• QoQ, MISC’s 4QFY22 CNP surged by 61% to RM913mil in tandem with a 16% increase in revenue to RM4.2bil, mainly stemming from higher earnings from the gas assets & solution division and offshore business. In 4QFY22, gas assets & solutions achieved a higher operating profit of RM460mil (+30% QoQ), aided by favourable currency movements and lower vessel operating costs.

• Surprisingly, despite increased project costs, the offshore business segment posted a stronger 4QFY22 operating profit of RM311mil (+64% QoQ), backed by higher revenue and improved profit margins from the conversion of Mero 3. On the other hand, the petroleum & product shipping segment’s EBIT declined to RM403mil (-14% QoQ) on high-base effect (due to RM230mil one-off compensation for a contract renegotiation back in 3QFY22).

• The gas assets & solutions segment became the largest earnings contributor, accounting for 42% of 4QFY22 group EBIT, followed by the petroleum & products shipping solutions (37%) and offshore business (28%) segments.

• We attended an analyst briefing yesterday with the following key takeaways:
  • In 4QFY22, the petroleum & product shipping division’s average term-to-spot ratio slightly improved QoQ to 77:23 from 72:28 as the increase in term charter ratio in Aframax from 76:24 to 92:8 mitigated the decrease in very large crude carrier from 36:64 to 30:70 and Suezmax from 75:25 to 73:27. Management highlighted that the higher spot exposure for VLCC was mainly due to term contract expiries, which is likely to be beneficial to the group amid a robust spot charter market.
  • The conversion of Mero 3 continued to chart an improved project progress on the back of normalised operations at CIMC Raffles’ yard in China, reaching 75% completion as at the end of 4QFY22 (from 59% in 3QFY22).
  • The group is also in the middle of formalising a mitigation plan, which could involve switching shipyards for topside fabrication and integration works due to concerns of potential operational disruptions in China. We note that the group would likely make the decision in the upcoming months ahead of CIMC Raffles’ scheduled completion of works in July 2023.
  • Meanwhile, we understand that the progress in negotiating with Petrobras to waive liquidated damages and penalties due to the delayed delivery of the FPSO is still underway and remains status quo at this juncture.
  • For LNG carrier operations, management affirmed that the contract expiry over the next 2 years would likely be 2 in 2023 and 3 in 2024. While potential contract renewals are mostly uncertain for now, management expects the recent delivery of 2 LNG vessels, namely Seri Damai and Seri Daya to ExxonMobil’s wholly-owned SeaRiver Maritime, to partially cushion any negative earnings impact.
  • The capex in FY23F is guided to be at least US$1bil, of which US$400-500mil is earmarked for Mero 3. The remaining capex is expected to fund ongoing expansions in other segments amid sustainable improvements in operating environment.
• The near-to-medium term outlook for MISC remains resilient backed by long-term contracts in LNG operations, elevated spot rates for petroleum tankers, as well as normalised conversion progress of Mero 3.

• MISC currently trades at a compelling FY23F EV/EBITDA of 7.5x, 17% below its 3-year average of 9x.

Source: AmInvest Research - 16 Feb 2023