• We maintain our HOLD recommendation on MISC with an unchanged fair value of RM7.35/share, which is at a 20% discount to our sum-of-parts valuation of RM9.19/share. This implies an FY17F EV/EBITDA of 9x, 1 SD below its 2- year average of 10x.

• Our forecasts are unchanged for now as the 2 new offshore shuttle tanker charters will only commence towards the second half of FY19F.

• MISC has been awarded a long-term contract to own and operate 2 specialist DP2 Offshore Loading Shuttle Tankers from Statoil ASA in oilfields on the Norwegian continental shelf of the North Sea, Norwegian Sea and the southern Barents Sea with total contract values estimated at US$475mil (RM2bil), which will be decided by 31 Dec 2017.

• The first contract covers 5 years for an estimated US$200mil while the second for 7 years with a value of US$275mil. MISC will commission Samsung Heavy Industries to build the 2 DP shuttle tankers, which will have a capacity of 125,000 dwt, for delivery in 2019 before chartering it to Statoil.

• Assuming a project IRR of 10%, we estimate that the vessels could cost US$150mil each or reach a total of RM1.3bil, which will marginally raise MISC’s low net gearing of 0.1x. This internal rate of return for the 2 vessels combined translates to 6% of FY19F earnings.

• MISC’s offshore division currently comprises 6 floating production storage and offloading vessels, 5 floating storage and offloading vessels, 2 mobile offshore production units and the Gumusut-Kakap semi-submersible floating production system.

• We are positive on this development as the expanding offshore division improves the group’s recurring income profile. In FY16, the offshore division accounted for 15% of group operating profit.

• LNG and offshore charter rates are mostly fixed for the long term, unlike MISC’s petroleum segment in which 43% of the vessels are on spot rates.

• We estimate that MISC’s FY17F earnings could drop by 9% from a 10% decline in petroleum spot prices.

• For the petroleum segment, VLCC spot rates plunged 36% month-on-month and 47% QoQ to US$15K/day in May this year due to lower cargo volumes from OPEC’s 1.2mil barrel/day production cut.

• We believe the stock currently trades at a fair FY17F EV/EBITDA of 9x, slightly below its 2-year average of 10x.

Source: AmInvest Research - 23 Jun 2017