Investment Highlights

• We maintain our HOLD recommendation on MISC with unchanged forecasts and fair value of RM6.65/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.

• MISC has acquired the floating, storage and offloading vessel (FSO) Mekar Bergading and signed a 16-year bareboat charter contract for it with Hess Exploration and Production Malaysia B.V. with an estimated contract value of US$441mil, commencing by 1 September 2018.

• The announcement did not reveal the acquisition price of the vessel, which is being converted from a tanker by EA Technique in Malaysia Marine and Heavy Engineering Holdings’ yard.

• EA Technique was earlier awarded the US$191mil EPCIC contract to build the FSO for the North Malay Basin by Hess and has made loss provisions of RM130mil (US$33mil) for additional costs incurred for the project.

• Assuming an all-in FSO cost of US$230mil, debt-to-equity financing of 70:30 and weighted average cost of capital of 6%, we estimate that this contract will marginally add 4 sen or below 1% to the group’s SOP.

• As highlighted in our update on 5 June, this is not a surprise as MISC was bidding for 2 potential FSOs with the cost of those vessels at US$200mil-US$300mil each. In our view, the cost of for these potential investments will not have a significant impact given MISC’s huge asset base.

• Apart from these FSOs, the group’s earlier FY18F 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.

• Petroleum tanker rates in May this year were still depressed due to constrained crude transportation volume, with spot rates down 20% for VLCC and 3% for Aframax, while flat for Suezmax since the beginning of the year.

• However, we remain optimistic that charter rates could improve with the impending relaxation of Organisation of Petroleum Exporting Countries’ (OPEC) production quotas, enforced since late 2016, amid normalising global inventories and resumption of US nuclear sanctions on Iran.

• 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 - 9 Jul 2018