• We expect MISC to continue benefitting from elevated tanker rate. The potential supply constraint has been aggravated by the drop in new orders to a record-low of 2.5% to the total fleet ratio.

• The company is also in good shape to ride on new O&G investment boom as FPSO Mero 3 is slated for completion in less than a year.

• Maintain MISC as a BUY with higher TP of RM8.10 which implies 0.9x FY24 P/B and 14x FY24F P/E. In near term, we think stronger earnings from Petroleum shipping segment could lift its stock price upwards.

Petroleum Segment to Drive Earnings Growth in 2023

We are optimistic with MISC earnings outlook as elevated tanker rate will provide the earnings boost to the company. Recall that the petroleum segment is the major contributor to the volatility in its earnings, while other segments (i.e., Offshore/FPSO and Gas/LNG) are mostly generating fixed rate income on the long-term basis. The rise in tanker rate that began in 2H22 has led to a 20% core earnings growth to RM2.2bn in FY22. We project core earnings to grow by another 8% to RM2.4bn in FY23 driven by the full year impact of elevated tanker rate.

Tanker Rate to Remain Elevated

While tanker rate remains volatile, we are sanguine that this could remain elevated over the next 2-3 years. This is due to the potential of supply constraint following the recent drop in new tanker orderbook-to-total fleet ratio that has fallen to a record-low of 2.5%. The fleet supply is not likely to increase significantly over the coming years due to construction lead times as well as limited available yard capacity in Asia which are already fully occupied with new orders for container ships and LNG/gas carriers.

Growth Opportunities are Abundant in Other Segments

Besides petroleum shipping segment, the outlook of other business segments including LNG shipping, offshore (FPSO) and MMHE remain robust underpinned by rising capex by O&G companies. The company has a lot of potential to undertake new expansion project given its robust balance sheet with low net gearing of 31% in 1Q23. However, it adopts a more cautious approach with its capex plan amidst the on-going construction of FPSO Mero 3 project that is worth USD2bn. The vessel had reached 85% physical completion as of 1Q23 and it is slated for delivery to Petrobras by mid of 2024.

Maintain BUY on MISC with TP of RM8.10

We maintain our BUY call on MISC with higher SOP-derived TP of RM8.10 (from RM8.00) as we roll over our valuation to FY24. This implies 0.9x FY24 P/B and 14x FY24F P/E. We favour MISC due to (i) proxy for growth in frontier oil and gas development projects through FPSO projects, (ii) recurring income from its asset-leasing business model and (iii) abovemarket dividend yield of c.5%

Source: BIMB Securities Research - 14 Jul 2023