• Following the CEO’s engagement session yesterday, we remain upbeat on MISC’s earnings growth potential despite the temporary setback in FPSO Mero 3 construction project.

• More importantly, the hiccup in engineering works for Mero 3 project has prompted the company to take steps to strengthen its in-house engineering capabilities. This will not only ensure seamless execution in future projects but also improve its margins, in our view.

• We cut our FY22-24F earnings forecast by 5-20% to account for the project delay and related cost provision.

• Maintain our BUY call on MISC with lower SOP-derived TP of RM7.85 (from RM8.10). MISC remains attractive due to (i) its long-term growth potential in lucrative FPSO market, (ii) recurring income from its asset-leasing business model and (iii) above-market dividend yield of c.5%.

The key takeaways from the CEO’s engagement session are:

• There’s some further delay in FPSO Mero 3 project for Petrobras due to some hiccup in engineering works that is done by Aker Solution. The project was previously contracted to CIMC Raffles’ yard in China before it got delayed due to economic lockdown. Accordingly, MISC has served forced majeure notice to its client to limit the financial impact from the delay.
• On the other hand, the company is currently bidding for the Total’s FPSO Cameia project in Angola as part of its growth plan. The company is partnering with Saipem which will provide engineering service for the project. There was also changes to contracting strategy by the client where it will only offer the EPCIC and O&M contracts to the bidders, effectively removing the lease charter contract. Therefore, no capex will be required from the potential winner.

• Petroleum tanker market remains weak and this will be a drag on the performance of petroleum tanker segment. However, this will be offset by the delivery of new additional vessels.

• Management guided that MISC’s FY22 earnings may be impacted by some non-cash charges particularly in the upcoming 2Q22 due to the FPSO Mero-3 project delay as well as potential asset impairment for LNG vessels which are nearing to the end of its initial charter period.

• Nonetheless, its cash flow generation is expected to strengthen in FY22 as Sabah Shell has resumed its charter payment to MISC for the Gumusut-Kakap FPS since March 2022. To recap, Sabah Shell has stopped making the payments since 2Q20 to offset the amount it was awarded by Arbitration Tribunal in an arbitration proceedings against MISC.

• We cut our FY22-24F earnings by 5-20% to account for the cost provision for the delay in FPSO Mero 3 (see Table 1).

Source: BIMB Securities Research - 1 Jul 2022