WHAT’S NEW

MISC announced that it secured a long-term bareboat charter contract with Hess for a floating, storage and offloading facility (FSO) known as FSO Mekar Bergading. The contract is pursuant to a sale and charter agreement in respect of the FSO between HESS and MISC, which resulted in MISC acquiring ownership of the FSO from HESS. The contract is of a firm period of sixteen (16) years with an estimated contract value of US$441m. The charter will commence latest by 1 Sept 18.

COMMENTS

• Needed contract win for offshore replenishment. Without the new contract wins, MISC would be less likely be able to replenish its offshore earnings which is facing a natural decline (finance lease) and several existing contracts which are up for expiry. We understand that the project IRR is at <10%, which implies the capex or cost of purchasing the vessel from Hess could be >$200m. The capex is likely high because of the long overruns from when E.A. Technique carried out the EPCC job with MMHE. Back then, the EPCC contract was at $192m and initial sailaway deadline was Jun 26 for Hess’ first gas target of end-16.
• No changes to forecast. Under finance lease recognition, the group may recognise initial one-off finance lease gains and we expect small yearly income from the FSO’s first year of charter. We expect a small yearly income of <$10m during the first year, and a decline thereafter. This is needed to replenish offshore earnings, hence, it does not warrant a change to our forecasts. Our 2018-20 offshore EBIT forecasts are unchanged at RM639m/RM642m/RM636m respectively. The capex of >RM3b also factors in the growth plans.
• Maintain HOLD and RM5.85 target price. Our SOTP implies 15x 2019F PE (in line with 5-year average P/E band) and 5.1% dividend yield. This is in view of the cyclicality of the shipping industry and low valuations for petroleum in view of wider losses. The risk-reward is not yet appealing given more earnings risk in 2Q, and a minor downside risk to dividends. MISC is encountering a year of a challenging cash flow generation clashed with the need for business growth. 2H18 is potentially a better investment horizon in view of petroleum tanker recovery. We advise RM5.30 as a good level to accumulate. However if the cash flow risk is not well contained (ie FCF projections fall way below our forecasts), trough valuation can be RM4.80 on 11.5x P/E, -1SD of its historical mean. Entry price: RM5.30.

Source: UOB Kay Hian Research - 9 Jul 2018