- We maintain our HOLD rating on MISC with an unchanged fair value of RM7.90/share, based on our sum-of-parts valuation.

- MISC has entered into an agreement with Petronas and Hyundai Heavy Industries (HHI) for the novation of the shipbuilding contracts between the latter two to MISC, for the construction and delivery of five newbuild LNG carriers. The newbuild LNG carriers will be delivered to MISC from September 2016 to December 2017 and the transaction will involve a capex of circa USD1.1bil (RM4bil).

- Petronas has also agreed to enter into a time charter agreement for all five LNG carriers upon taking delivery. The time charters will have a firm period of 15 years and an option for extension for another 5 years.

- Separately, Petronas has agreed to extend the time charter of its five existing Puteri Class LNG carriers that has and will be expiring over the next three years, upon the refurbishment of these vessels. The time charters will be extended for another 10 years for each vessel, and will commence upon the delivery of each refurbished vessel, expected to be from September 2015 to September 2017.

- This is a positive for the company as the overhanging uncertainty surrounding its expiring LNG fleet charters is now lifted. Furthermore, earnings contributions from the newbuild carriers starting from FY17 will further underpin the stable earnings from its LNG segment.

- It remains unclear at this juncture as to how the newbuild vessels will be funded. The group’s balance sheet is healthy, with a cash balance of RM4.8bil and net gearing level of 14% as at end-December 2014.

- We estimate that the newbuild carriers will potentially increase our FY17F earnings by ~5%. We leave our earnings estimates and fair value unchanged for now pending further guidance from the management. We have already assumed a renewal of the Puteri Class LNG vessels at a lower charter rate in our forecasts.

- LNG rates remain under pressure (time charter and spot rates declined by 28% and 26% YoY, respectively, in 4QFY14) due to the huge delivery of new vessels and weak demand during the mild winter season.

- The stock currently trades at an FY15F PE of 16x.

Source: AmeSecurities