• We attended MISC’s virtual analyst briefing yesterday and we left the event rest assured that it is fully prepared to undertake and deliver FPSO Mero 3 project seamlessly.

• We believe the execution risk is low as it has outsourced a large chunk of the workscope to credible partners. While this hurts the returns, we believe this project will enhance its track record in the supply of complex FPSO project hence opening up opportunities to secure more projects in the long run.

• Maintain BUY with unchanged TP of RM8.40. We believe current weakness in share price is a good opportunity to accumulate.

Background of Mero 3 project

FPSO Mero 3 project is the third FPSO ordered by Libra consortium (owned by Petrobras, Total and Shell) for the full field development of Libra oil field at the Santos Basin offshore Brazil. The FPSO will be on long term charter for 22.5 years beginning 1H2024. It shall contain 180,000 bpd of oil and 12m cbmpd of gas processing capacity as well as 1.4m barrels of oil storage capacity.

The fruit of 4 years’ preparation

Efforts to expand its footprint in Brazil has started since 2017 with the hiring of personnel with deepwater Brazil experience and it eventually more than double the number of corporate employees in the Offshore Business unit (OBU). Prior to securing Mero 3 project, it has participated in at least 2 bids including Mero 2 project which were intended mainly as trial bids to get used to the Brazilian FPSO project.

Low execution risk

We believe the execution risk is reduced as it has shifted the conversion work to Chinese yard instead of Singaporean yard due to former’s familiarity with Brazilian project. Furthermore, it has tied up with Aker Energy and Siemens as its technical partners to ensure seamless project execution. Accordingly, this lower down project returns which is compounded by high local content requirement of 40%. Management has guided that the capex for the project stands at c.USD2bn which is much higher than USD1bn capex for Yinson’s Brazilian FPSO project.

Sacrificing superior returns for long term benefits

Despite lower return than its peers, we believe MISC will be able to leverage on this project to demonstrate its capability to undertake complex FPSO projects, hence opening up opportunity to pursue projects elsewhere. In fact, it has received several invitations to bid for FPSO projects globally following the project award. In the long run, it seeks to increase the scope that it can be done in-house to gradually improve the return from future FPSO projects.

Maintain BUY with unchanged TP of RM8.40

Reiterate our BUY call on MISC with unchanged SOP-derived TP of RM8.40. We continue to like the company due 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.

Source: BIMB Securities Research - 14 Oct 2020