Investment Highlights

• We maintain HOLD on MISC with an unchanged sum-ofparts (SOP) based fair value of RM7.79/share, which implies an FY23F EV/EBITDA of 8.7x, slightly lower than its 3-year average of 9x. Our fair value also reflects a premium of 3% for our unchanged 4-star ESG rating.

• We maintain our forecasts after meeting the group’s management at an engagement session yesterday. These are the key takeaways from the meeting:
  • Management remains committed to minimising stranded asset risks as its fleet of petroleum tankers and liquified natural gas carriers may become obsolete over the long term against the backdrop of a decline in oil consumption induced by the energy transition. In this regard, the group is banking on various opportunities in the carbon capture and storage (CCS) space, aiming to build up decarbonisation-related operations. Even so, the group believes oil and gas will stay relevant at least for the coming decade.
  • Management expects the petroleum tanker market to remain tight amid a record-low orderbook of newbuild vessels. In addition, MISC also observes a shrinking size of “shadow fleet” in the market which could further propel charter rates over the short to medium term. Shadow fleet (also known as “dark fleet”), estimated to account for 10% of world’s crude tankers, comprises of older tankers with opaque ownership that operate outside Western insurance, financial, and shipping service circles. Multiple sources earlier reported that Russia has been increasing its shadow fleet since late 2022 to avoid the oil price cap imposed by G7 countries.
  • The group intends to maintain the petroleum & product shipping division’s average term-to-spot ratio (TSR) close to the targeted range of 70%-80% in a bid to build a resilient recurring income stream. Recall that the group’s average TSR stood at 84:16 as at the end of 1QFY23, slightly higher than the targeted range as MISC took advantage of the elevated spot market to lock in vessels at lucrative time charter rates.
  • Meanwhile, we understand that the conversion progress of Mero 3 floating, production, storage, and offloading (FPSO) remains well on track and has earlier reached 90% completion (from 85% as at end-1QFY23). The vessel is set to be delivered to Petrobras in May 2024 and subsequently commence charter in late 2024.
  • We also note that the group remains keen on the divestment of a partial stake in Mero 3 as soon as the vessel commences charter. Management expects the vessel to fetch a more compelling valuation upon accomplishing the charter commencement milestone which will yield a better return to the group for addressing construction risks earlier.
  • More positively, management revealed that a potential buyer has expressed interest in taking over a partial stake in the FPSO, implying a potentially swift improvement in MISC’s balance sheet by late 2024.
• MISC currently trades at a fair FY23F EV/EBITDA of 8.8x, close to its 3-year average of 9x.

Source: AmInvest Research - 7 Jul 2023