• We view MISC as a defensive oil and gas stock owing to its (i) recurring income from its asset-leasing business model, (ii) a midstream company with potential benefit from oil price crisis, and (iii) above-market dividend yield.
• We think it deserves a re-rating following various expansion plan which we estimate could double its orderbook to RM48bn.
• Our estimates imply a 18% earnings CAGR over FY2019-22F driven by income from 19 new petroleum tankers and LNG vessels and construction gains from new FPSO Mero 3 project.
• We initiate coverage on MISC with a BUY call and RM8.40 SOPderived TP. This implies 1.1x FY21F P/B.

​​​​​​​A defensive oil and gas stocks

We view MISC as a defensive oil and gas stocks whose earnings are mostly backed by recurring income from long-term charter contracts in LNG and FPSO business. We estimate its orderbook to be worth c.RM23bn which is c.6.5x FY19 LNG and FPSO combined revenue. In addition, it is a one of the beneficiaries of low oil price due to oil tanker vessels used by traders to store excess oil when the market is oversupplied, leading to higher tanker rate. MISC pays dividend quarterly which currently yields c.3.5-4%.

On spending spree for asset acquisition

Under its asset leasing business model, the leased assets provide steady cash flows. Meanwhile MISC is also looking to acquire more asset to grow its earnings. In the near-term, it is set for huge capex spending to sustain its earnings growth. Management expects to spend c.USD3bn over the next 3-4 years by acquiring new vessels and constructing the FPSO Mero 3, which we expect could double its orderbook to c.RM48bn.

Sustainable earnings growth ahead

Based on our estimates, we expect MISC to deliver strong earnings growth of 18% CAGR over 2019-22F. Our forecast factors in: i) FPSO Mero 3 worth USD2bn of capex and ii) new income from additional 19 new petroleum tankers and LNG vessels. This is further supported by increasing tanker rates due to oversupply in oil supplies leading to more tankers are used for offshore storage.

Initiate with BUY and TP of RM8.40

We initiate coverage on MISC with BUY and RM8.40 TP based on sumof-parts (SOP) method (Table 4). This implies 1.1x FY21F P/B. While it currently trades at 5-year mean P/B of 0.9x, we think it deserves a rerating following its expansion plan.

Source: BIMB Securities Research - 12 Oct 2020