Investment Highlights

• We maintain our forecasts and HOLD on MISC with an unchanged sum-of-parts (SOP) based fair value of RM7.81/share, which implies an FY24F EV/EBITDA of 8.4x, slightly below its 3-year average of 9x (Exhibit 3). It also reflects a premium of 3% for our unchanged 4-star ESG rating (Exhibit 6).

• MISC’s 9MFY23 core net profit (CNP) of RM1,586.18mil (after stripping out RM20.3mil unrealised foreign exchange gain together with RM20mil write-off of impairment loss on finance lease and other receivables) came in within expectations at 73% of our FY23F earnings but slightly below consensus forecast at 69%. For reference, 9M accounted for an average of 70% of FY21-FY22 CNP.

• The group declared a third interim dividend of 7 sen, bringing 9MFY23 dividend per share (DPS) to 24 sen. This translates to a payout ratio of 73%.

• YoY, the group’s 9MFY23 revenue rose by a meagre 3.1%, mainly dragged by lower progress billings from the construction of floating, production, storage and offloading vessel (FPSO) Mero 3. This was offset by improved freight rates for the Petroleum & Product Shipping segment and the contribution of new and on-going projects from the Heavy Engineering segment.

• Despite a flattish operating profit performance as widening losses from the Marine & Heaving Engineering segment wiped out gains generated by nearly all other segments, 9MFY23 CNP rose by a more substantive 30% due to higher interest income and associate contributions.

• QoQ, 3QFY23 revenues declined by 5.2% primarily from lower revenues of the Marine & Heavy Engineering segment. At the CNP level, the group registered a larger decline of 15.6% on the back of higher effective tax rate and weaker operating profit as: (i) Mero 3 is within the tail-end of its progress with a reduction in construction margin; and (ii) the Marine & Heavy Engineering segment booked in additional provisions from the impact of cost escalations on ongoing projects.

• We note that the Gas Assets & Solutions segment continues to be the largest earnings contributor at 61% of 9MFY23 group EBIT, followed by Petroleum & Product Shipping at 47% and Offshore 23%.

• Salient highlights from the analyst briefing yesterday:
  ➢ MISC updates that the FPSO Mero 3 has achieved overall physical completion of 91.7% and recently completed the installation of gas turbines. We believe management is hopeful for sail away to occur by 1QFY24 and reach the offshore site by the following quarter.
  ➢ We gather that LNG shipping market continues to see strengthening spot rates heading into 4QFY23 driven by the rerouting of shipments from geopolitical tensions and winter season demand. Additionally, orders for newbuilds are currently seeing a surge amidst strong LNG floating storage unit (FSU) demand as global liquefaction capacity increases in the medium term.
  ➢ In contrast, the petroleum shipping market has seen spot rates soften in 3QFY23 following weak seasonal demand, autumn refinery maintenance and a surge in oil prices. The orderbook for crude tankers may continue to see a decline due to concerns over higher asset prices and uncertainty over the provision of sustainable fuels.
  ➢ The Offshore market continues to see steady growth in line with the expected increase in upstream capex spending, particularly concentrated in the Atlantic Basin.

• MISC currently trades at a compelling FY24F EV/EBITDA of 8.2x, 10% below its 3-year average of 9x.

Source: AmInvest Research - 23 Nov 2023