Investment Highlights

• We downgrade MISC to HOLD from BUY with an unchanged sum-of-parts (SOP) based fair value of RM7.79/share (from RM8.11/share previously) upon lowering our valuation for its petroleum tanker fleet. Our FV also implies an FY23F EV/EBITDA of 8.4x, slightly lower than its 3-year average of 9x. It also reflects a premium of 3% for our unchanged 4-star ESG rating.

• We expect the recent production cut by the Organization of the Petroleum Exporting Countries (OPEC) to exert downward pressure on spot petroleum tanker rates, clouding the near-term outlook for MISC’s fleet. Thus, we slightly reduce FY23F/FY24F earnings by 2%/4% after pencilling in lower freight rate assumptions for its petroleum shipping operations.

• OPEC unexpectedly announced another production cut of 1.16mil barrel of oil per day (bopd), starting in May 2023, in a bid to keep oil prices above US$80/barrel. Coupled with its previous production cut of 2mil bopd back in November 2022 and Russia’s cut by 500K bopd early this year, OPEC+ is reducing its output by 3.66mil bopd this year, which translates to 3%-4% of world supply currently.

• The production cut may potentially result in lower crude shipping volume over the coming months, depressing petroleum tanker freight rates which have been on a declining trend since the end of 2022. It is worth noting that 40%-50% of global crude output is transported by sea.

• In 4QFY22, spot accounted for 23% of the petroleum & product shipping division in which Aframax was 8%, Suezmax 27% and very large crude carriers (VLCC) 70%.

• We estimate that a 10% decrease in average day rates below our current assumptions could lower FY23F earnings by 5%, assuming 50% spot exposure and 40% EBIT contribution for FY23F.

• The scarce number of newbuild petroleum tankers over the coming years would help to cap vessel availability over the globe, cushioning the negative impact of lower crude shipping volume. The tight vessel market is also backed by continued reshuffling of Russian oil trades to Asia from Europe previously, which kept tankers employed for longer durations over the greater distances.

• Notwithstanding the potential volatility in the petroleum & products shipping segment, we highlight that the earnings outlook in FY23F remains resilient on the back of stable recurring earnings from liquified natural gas (LNG) operations (>95% of the fleet backed by long-term contracts) coupled with the normalised conversion progress of Mero 3 in China.

• MISC currently trades at a reasonable FY23F EV/EBITDA of 7.6x, 16% below its 3-year average of 9x.

Source: AmInvest Research - 5 Apr 2023