• MISC is likely to transfer the FPSO Mero 3 out of China in order to  ensure a timely delivery to its client by mid-2024. This is crucial  for the company as it seeks to expand its FPSO operation abroad.

• We expect its earnings to remain robust in 2023 to be driven by  escalating petroleum tanker rates.

• Maintain our BUY call on MISC with unchanged SOP-derived TP of RM8.00. MISC remains attractive due to (i) its long-term growth  potential in the lucrative FPSO market, (ii) recurring income from  asset-leasing business model and (iii) above-market dividend  yield of c.4.5%.

Building a Sustainable Income from a Portfolio of Vessels

MISC is optimistic that its business strategy to secure a long-term  recurring income from its assets will underpin a sustainable growth in  the foreseeable future. The company remains favourable towards term charter contract despite rising spot rate in LNG segment, hence  limiting exposure to market risk.

Note that the spot rate for LNG vessel was trading at USD195k/day in  December 2022 which is 64% higher than a 3-year time charter rate  of USD120k/day. Nonetheless, the company has sold Puteri Intan 1  LNG vessel for USD35mn in January 2023. The vessel is one of the  older vesselsthat is available for trading in spot market. Management  guided that while it is a good time to leverage on good spot market to  earn higher income, the usage of older vessel will result in higher  compliance cost to the new carbon emission guideline. As at 4Q22, the company owns a total of 91 vessels and 19 on-order  newbuild vessels. 2 new LNG vessels namely Seri Damai and Seri Daya  were delivered to Exxon’s SeaRiver Maritime LLC in January 2023.  Another 12 new LNG vessels that are owned through a consortium  with Nippon Yusen, Kawasaki Kisen and China LNG Shipping, will be  delivered to QatarEnergy in 2025/26. There will also be 3 new VLCC  vessels that will start operation in 1H23.

Focusing on FPSO Mero 3 Project Delivery

While the company is managing its portfolio of vessels in LNG and  Petroleum segments, its long-term earnings growth will be driven by  the commencement of FPSO Mero 3 lease charter beginning FY2025.  The construction of the vessel already reached 75% completion in  4Q22 and it is on track for delivery to Petrobras by mid-2024. The  vessel is currently located at CIMC Raffles shipyard in China. MISC is  looking to transfer the vessel to yard in other countries by mid-2023  in order to limit its exposure to China’s strict COVID-19 policy which  previously resulted in a 6-month delay in the construction of the  vessel. The company has made cost provision for the delay but it is seeking for some compensation claims from its client with regards to  higher cost.

Stronger 4Q22 Earnings on FPSO Mero 3 Project Progress

MISC’s revenue grew by 16% QoQ and 35% YoY to RM4.2bn driven by the construction revenue of  FPSO Mero 3 vessel. This, coupled with higher petroleum tanker rates, pushed earnings to rise by  14% QoQ and 99% YoY to RM904mn. Similarly, earnings for the full year FY22 grew by 21% YoY to  RM2.3bn mainly due to higher petroleum tanker rate supported by lower losses from MMHE. Overall, this is largely within our expectation.

Dividend Payout

A final DPS of 12 sen was declared (ex-date on 28 February and payment date on 15 March) which  is similar to 4Q21 DPS. This brings total FY22 DPS to 33sen (FY21: 33 sen) which implies a payout  ratio of 67%. We believe the company can maintain annual DPS of 33sen in the foreseeable future  which implies a dividend yield of 4.4%. Note that, there is an upside risk to dividend payment from  the commencement of FPSO Mero 3 lease charter beginning FY25F onwards.

Maintain BUY with unchanged TP RM8.00

We reiterate our BUY call on MISC with unchanged SOP-derived of TP of RM8.00 (see Table 1). We  favour MISC due to (i) proxy for growth in the frontier oil and gas development projects through  FPSO projects, (ii) recurring income from asset-leasing business model and (iii) above-market  dividend yield of c.5%.

Source: BIMB Securities Research - 22 Feb 2023