Investment Highlights

• Following the strong rebound of 19% in its share price since our upgraded call last Thursday, we now revert our recommendation on MISC back to HOLD from BUY with a lower fair value of RM6.65/share (from an earlier RM6.95/share), which is at a 20% discount to our revised sum-of-parts valuation of RM8.31/share. This implies an FY18F EV/EBITDA of 8.5x, below its 2-year average of 10x but in line with AP Moller-Maersk.

• After the engagement session with MISC’s president/CEO Yee Yang Chien yesterday, we have lowered the group’s FY18F-FY20F earnings by 12%-13% with a further cut of 10% to our petroleum charter rate assumptions.

• MISC registered a negative one-off adjustment of US$6mil largely due to the Yemen LNG accrued revenue reversal in 1QFY18. Together with potential vessel impairments and finance lease adjustments, the group could report another US$40-$50mil one-off items in the coming 3 quarters.

• Excluding these one-off items, which also include GumusutKakap adjudication gain and Benchamas construction profit, management guided that FY18F core operating cash flow could be lower by 10% YoY while core net profit could decrease by over 20% YoY. Even so, this should still allow management to maintain a consistent dividends payout, currently yielding an attractive 5%.

• The group’s FY18 committed capex of US$600mil could double with the delivery of 2 LNG carriers, 2 Suezmaxes, and 3 Aframaxes. This includes the 4 shuttle tankers for Petrobras and the addition of 2-3 additional tankers in Southeast Asia. Management indicated that the 4 Petrobras shuttle tankers could cost US$360mil-400mil, lower than our earlier estimate of US$500mil.

• Upstream had earlier reported that MISC was interested in participating in the tender for Petrobras’ Buzios-5 FPSO charter. However, management affirmed that it is not actively bidding for any FPSO project in Brazil pending the completion of requisite alliances with local partners by the end of this year.

• MISC will be bidding for 2 potential FSOs; one to be deployed in the Ubon field in the Gulf of Thailand while the other in Vietnam. In our view, the cost of US$200mil-US$300mil each for these potential investments will not have a significant impact given MISC’s huge asset base.

• We remain optimistic that charter rates could improve if the Organisation of Petroleum Exporting Countries (OPEC) relaxed its production quotas, enforced since late 2016, amid normalising global inventories and resumption of US nuclear sanctions on Iran.

• However, petroleum tanker rates are still depressed due to the constrained crude transportation volume, with spot rates down 60% for VLCC, 33% for both Aframax and Suezmax since the beginning of the year. Hence, we expect the charter recovery to materialise in 4QFY18 in tandem with the traditional peak winter season.

• The stock currently trades at a fair FY18F EV/EBITDA of 8.5x, in line with AP Moller-Maersk, and supported by attractive dividend yields.

Source: AmInvest Research - 5 Jun 2018