News

Petronas announced that it has decided to directly procure newbuild LNG (liquefied natural gas) ships to meet its transportation requirements, in order to optimize the value of its LNG business (direct access to LNG shipping capacity at lowest possible cost).

Petronas will be engaging MISC to provide Project Management and Technical Consultancy services for the construction of the new LNG ships, given MISC’s extensive experience and expertise in the LNG shipping sector and familiarity with PETRONAS’ business needs.

Financial Impacts

None.

Comments

The news is expected to negatively impact investors’ sentiment on MISC’s future positioning within Petronas Group, as well as the future earnings potential.

Technical Consultancy services is likely to contribute lower earnings to MISC (vs. providing LNG shipping services).

MISC has always been the sole supplier of LNG ships for Petronas’s LNG business, since Petronas acquired MISC stakes in 1998 and injected Petronas’s owned 5 Puteri Class LNG ships into MISC.

We believe that Petronas is attempting to lower investors’ expectations on MISC as well as potentially consolidating MISC back into the Group in the future. Note that Petronas attempted to privatize MISC in early 2013 with revised offer of RM9.2bn or RM5.50/share, but failed.

We do not see the economic feasibility of having two identical LNG shipping subsidiaries, which may involve higher overall cost with lower economies of scale.

Risks

• Continued oversupply of petroleum and chemical ships, depressing charter rates further.
• Increased in bunker cost.
• Slow recovery of global economy.

Forecasts

Unchanged, as the short term earnings are not impacted.

Rating

BUY

Positives –

• Potential synergy from VTTI.
• Stronger earnings post disposal of Liner Division.
• Strong support from Parent Group, Petronas.

Negatives –

• Slow down in global economy growth.
• Continued oversupply of tankers, pressuring freight rates.
• High bunker cost.

Valuation

Our valuation has only taken into account the potential 8 LNG ships (called for tender in early 2013), which is expected to start delivery by end 2015. We remained positive on MISC in the longer term and maintained BUY recommendation with unchanged target price of RM6.50.

Source: Hong Leong Investment Bank Research - 5 Aug 2013