Investment Highlights

• We maintain our HOLD recommendation on MISC with unchanged forecasts and fair value of RM6.95/share, which is at a 20% discount to our revised sum-of-parts valuation of RM8.68/share. This implies an FY18F EV/EBITDA of 8x, below its 2-year average of 10x but in line with AP Moller-Maersk.

• MISC's wholly-owned AET Tanker Holdings S/B has secured long-term charters of 10 years for 4 specialist DP2 Suezmax-sized shuttle tankers from Petróleo Brasileiro S.A. (Petrobras) to operate in international and Brazilian waters.

• Expected to commence in 2020, these new vessels will be in addition to the 2 AET DP2 ships, whose charters were awarded in 2010, and currently operating in the Brazilian Basin for Petrobras.

• The vessels will be built in accordance with Petrobras’ latest technical requirement for DP2 shuttle tankers and installed with a ballast water treatment system. Each will be equipped with high power thrusters and generators fully capable of operating in harsh weather conditions.

• While the announcement did not reveal the capex or charter rate, we note that Teekay Offshore Partners had ordered 2 Suezmaxsized, DP2 shuttle tankers for US$265mil or US$133mil each from Samsung late last year.

• Hence, these 4 tankers, each weighing 152,000 deadweight tonne and will also be built in Korea, could cost an estimated US$500mil. Assuming project financing of 80% and equity IRR of 20% could slightly the group's FY20F EPS by 3%.

• However, MISC may be leveraging its relationship to expand other offshore operations into Brazil. Upstream reported that MISC had submitted a surprise bid for the Buzios-5 floating production storage and offloading (FPSO) charter in which Japan’s Modec and Exmar are also participating.

• MISC's decision to bid for Buzios-5 could be partly to gain experience in Petrobras’ tender procedures while positioning for the more attractive Marlim and Parque das Baleias FPSO projects, potentially carrying a capex of over US$1bil each, in which there will be no local content requirements which tend to substantively raise costs.

• Modec, which recently signed contracts with Petrobras to supply the Mero-1 and Sepia FPSOs, and the current frontrunner for the Buzios-5 tender, is expected to abstain from the tenders for Marlim and Parque das Baleias. SBM Offshore is also expected to sit out of these tenders, as the Dutch player struggles to reach a final resolution with Brazilian authorities on a leniency agreement related to previous corruption cases.

• Supported by a low net gearing of 0.2x, MISC is targeting an FY18F capex of US$500mil and US$4bil over 5 years for new FPSOs and shuttle tankers. We note that the 4 new DP2 shuttle tankers would already cost slightly over US$500mil.

• The stock currently trades at a fair FY18F EV/EBITDA of 8x, in line with AP Moller-Maersk, and supported by attractive dividend yields of 4%.

Source: AmInvest Research - 28 May 2018