Investment Highlights

• We maintain our HOLD call on MISC with an unchanged fair value of RM7.79 per share based on a sum-of-parts (SOP) valuation. Our fair value, which incorporates a 3% premium from our unchanged 4-star ESG rating, reflects a FY24E of 14.8x, at 1 SD below its 5-year average of 18.3x.

• We believe that there is a possibility of further impairments for floating, production, storage and offloading vessel (FPSO) Mero 3 as the current tight supply chain environment for the FPSO market could continue to persist and create potential delays in delivery for MISC in the near term, particularly in relation to the 40% local content requirement.

• We gather that Chinese yards qualified by Petrobras has faced challenges with adhering to local content requirements from reports as early as mid-2022. Upstream had suggested that companies will have to resort to fabrication of certain FPSO modules such as the top-side component or carrying out the commissioning in Brazil rather than through bulk purchase of materials.

• Notably, the FPSO Mero 3 local content requirement is comparably higher than past FPSO contracts for MISC and local operator, Yinson. For reference, Petrobras is mandating a minimum local content requirement of 25% for the most recent FPSO P-85 bid for the Buzios development that is said to be potentially awarded to Singapore’ Seatrium.

• This is consistent with other recent FPSO awards in Brazil which include strict conditions for services to be executed domestically through a partnership or subcontracting portion for local companies.

• On the delivery of FPSO Mero 3, management views that conversion progress is on track and has reached 90% completion (from 85% as at end-1QFY23). Further to this, the project is likely to continue with full integration and commissioning at CIMC Raffles’ yard in Yantai, China.

• Although cognizant of management’s commitment to FPSO Mero 3’s delivery by June 2024, 6 months later than initially set, we remain concerned over potential further delays given constrained supply chain environment for the FPSO industry.

• We understand MISC is still negotiating to waive liquidated damages and penalties due to the 6-month delay in delivery of the FPSO. Recall, the group had booked in provisions and increases in total cost by 10% for FPSO Mero 3 in FY22.

• To ascertain the potential impact of the provision, we employ a scenario analysis (Exhibit 1), as follows:
  i. Base Case: total impairment of RM527mil (23% of FY24F earnings), based on a 25% increase to local content costs and delayed delivery of 6 months.
  ii. Best Case: total impairment of RM247mil (10% of FY24F earnings), based on 10% increase to local content costs and delayed delivery of 3 months.
  iii. Worst Case: total impairment of RM1.5bil (64% of FY24F earnings), based on 40% increase to local content costs and delayed delivery of 12 months.

• For now, we maintain our forecasts as there are 2 upside risks that could moderate the final impact of FPSO Mero 3 towards the group, namely:
  • The ongoing negotiation on late delivery charges with Petrobras; and
  • Potential divestment of a partial stake in FPSO Mero 3 during the early phase of the charter contract. Note that the group had revealed that a potential buyer has expressed interest in buying a partial stake, and thereby implying a potentially swift improvement in MISC’s balance sheet by late 2024.
• MISC currently trades at a FY24F PE of 13.3x, 1SD below its 5-year average of 18.3x.

Source: AmInvest Research - 19 Oct 2023