• We are optimistic on MISC’s earnings outlook as it may generate new revenue stream from transport of liquefied carbon dioxide as part of Petronas’ CCS ambition. More importantly, this will ensure earnings sustainability of the company amidst concern on long-term demand for oil and gas.

• We are affirmative that this initiative will be successful leveraging on its (i) strong capability in operating non-conventional tanker and (ii) tie-up with oil major who has strong commitment to decarbonisation target. Nonetheless, we make no changes to our earnings forecast as it still premature to estimate potential earnings contribution from this emerging market.

• Maintain our BUY call on MISC with a higher SOP-derived TP of RM10.00 which implies 17x FY24F P/E. We foresee multiple key re-rating catalysts on the stock coming from (i) new upcycle in tanker rate, (ii) new income stream from CCS value chain, (iii) maiden income from FPSO Mero 3 beginning FY25, and (iv) new FPSO contract award which may come post-delivery of FPSO Mero 3.

Newly Designed Vessel for LCO2 Approved

Recently Petronas announced that it has attained four Approvals in Principle (AiPs) to develop liquefied carbon dioxide (LCO2) carriers and LCO2 floating storage and offloading unit (FSO) under a collaboration with Mitsui O.S.K Lines and Shanghai Merchant Ship Design & Research Institute (SDARI).

The approvals were awarded by the classification societies Det Norsk Veritas AS (DNV) and American Bureau of Shipping (ABS) which indicate that the basic design of those vessels have met the minimum technical requirement and safety criteria. Specifically, the AiPs are given for (i) a short haul LCO2 carrier with capacity of 14,000 m3 by DNV, (ii) a long haul LCO2 carrier with capacity of 84,000 m3 by DNV, (iii) an LCO2 carrier with capacity of 87,000 m3 equipped with dynamic position (DP) System by ABS and (iv) a 96,000 m3 LCO2 FSO for intermediate storage by ABS.

Embarking on CCS Journey

We believe this is positive to MISC as it will benefit from commercialisation of this vessel leveraging on its position as Petronas’ shipping arm. The newly-designed vessel will be utilised for trade and transport of LCO2 as a solution for global decarbonisation effort as well as development of carbon capture and storage (CCS) value chain within Asia Pacific and Oceania region. During MISC CEO engagement session that we participated recently, management has guided that this vessel will be operated under its New Energy segment and it set to make a final investment decision (FID) on construction of the vessel possibly within the next 12-24 months.

No Change to Earnings Forecast

While it’s still quite premature to take this into our earnings forecast, we think the likelihood of its success is high owing to (i) MISC’s capability in operating other non-conventional tanker such as very large ethane carrier (VLEC), (ii) strong commitment to decarbonisation target by oil major such as Shell, ExxonMobil, Total etc, and (iii) MISC’s existing relationship with the oil major as its premier clientele.

Outlook: Higher Tanker Rate is Here to Stay

Despite recent correction in tanker rate, we think it will remain elevated moving forward due to (i) lowest orderbook-to-fleet ratio since 1980s, (ii) limited yard availability for newbuilding, (iii) risk of stranded assets due to uncertainties in long term oil demand (note: average tanker useful lives is 15-20 years), (iv) concern on carbon emission regulation, and (v) higher tonne-mile demand. The higher tonne-mile demand is supported by (i) rising refining capacity in the East (China and India), (ii) rising crude production from the West, and (iii) rising global oil demand to nearly 106mn bbls in 2028, according to estimate by IEA.

Maintain BUY with higher TP RM10.00

We reiterate our BUY call on MISC with higher SOP-derived of TP of RM10.00 (from RM8.10) (see Table 1). We foresee multiple key re-rating catalysts on the stock coming from (i) new upcycle in tanker rate, (ii) new income stream from CCS value chain, (iii) maiden income from FPSO Mero 3 beginning FY25, and (iv) potential new FPSO contract award post-delivery of FPSO Mero 3.

Source: BIMB Securities Research - 17 Jul 2023