Investment Highlights

• We raise our call on MISC to BUY from HOLD with a highe sum-of-parts based fair value (FV) of RM8.50/share (from RM7.81/share previously), which implies a FY24F EV/EBITDA of 8.8x, broadly at par to its 5-year average of 9x The FV reflects a premium of 3% for our 4-star ESG rating .

• The group’s FY23 core net profit of RM2.3bil was abov expectations, exceeding our estimate by 8.2% and street’s by 6%. Hence, we raise our earnings by 3%-4% for FY24F-FY25F to account for stronger growth outlook for both the petroleum and gas sub-segments, as well as the commencement o charter revenues for floating production storage and offloading (FPSO) Marechal Duque de Caxias (Mero 3) in 4QFY24F.

• The group declared a fourth interim dividend per share (DPS of 12 sen. This brings FY23 DPS to 36 sen. This came slightly above our expectations by 9% and translates to a payout ratio of 76%. Moving forward we expect the group to maintain DPS at current levels, broadly in-line with its historical trend.

• YoY, the group reported flattish revenue growth of 2.9% fo FY23 as it was dragged by weaker performance from the offshore business segment, which recorded lowe recognition of construction works for FPSO Mero 3. FY23 CNP rose higher by 8.2% due to higher interest income and contribution from associates.

• Notably, although YoY revenue from the marine & heavy engineering (MHE) nearly doubled as the group’s 66.5% owned Malaysian Marine and Heavy Engineering (MMHE recorded strong contribution from new and existing projects such as the EPCIC Jerun Development, Rosmari-Marjoram and the Kasawari carbon capture & storage projects, the segment registered an operating loss of RM232mil due to additional cost provisions from revised schedule and price escalations for heavy engineering-related projects.

• QoQ, MISC 4QFY23 revenue grew by a strong 27% sequentially, lifted by nearly all segments, particularly MHE (+77%) and the offshore business (+43%). 4QFY23 CNP sho upwards by 62% QoQ as operating margins for the petroleum & product shipping segments increased by 5.9%-points and offshore business 11.9%-points.

• The group reports that FPSO Mero 3 has begun its sail away voyage to the client’s oilfield in Brazil on 24 February. Reca that construction of the vessel was completed in January 2024 with commendable audit results by ANP during the onshore commissioning phase. We gather that first oil/fina acceptance deadline will be in August 2024.

• Guidance from management indicates that shipping industry outlook will see broad-based strength in the near- term, as follows:
  
  ➢ Prospects for liquefied natural gas (LNG) shipping will remain positive, driven by demand growth in Asia. Global liquefaction capacity is expected to increase in 2024 with final investment decision (FID) for LNG facilities amounting to 100-150 metric tonne per annum (mtpa).
  
  ➢ The petroleum shipping market is expected to benefit from strong Atlantic exports and increased crude imports to Asia. However, a tight tonnage supply environment over the next 2 years (up to 2025) will support high spot rates.
  
  ➢ The offshore segment continues to see an uptrend in the global FPSO market, driven primarily by projects in Latin America and Asia-Pacific, backed by a 6% increase in global offshore exploration and production capex in 2024.

• MISC currently trades at a comfortable FY24F EV/EBITDA of 8.1x, 10% below its 5-year average of 9x. We believe the group deserves to be traded at a higher valuation level against a backdrop of a resilient industry outlook and as the group continues to address overhang issues, particularly the deployment of FPSO Mero 3 and losses at MMHE.

Source: AmInvest Research - 28 Feb 2024