• MISC has entered into a Novation Agreement with Parent Co Petronas and Hyundai Heavy Industries, to assume the Shipbuilding Contracts for the construction of 5 LNG tankers, with an estimated cost of USD1.1bn.

• The newbuild 5 LNG tankers will be delivered to MISC starting Sep 2016 to Dec 2017, which will be chartered back to Petronas for a period of 15+5 (option) years.

• Separately, MISC has also won 10 years contract extension for the near expiring 5 Puteri Class LNG Tankers from Sep 2015 to Sep 2017. The tankers will be undergoing refurbishments before continuation of services to Petronas.

Comments

• We are overall positive on the LNG asset injection exercises and contract extensions of the Puteri Class LNG tankers.

• Looking at the current low LNG tanker long term charter rate of US$70k/day for modern fleets (from high of US$140k/day) and US$35k/day for second generation fleets. We believe the IRR for the newbuild 5 LNG tankers and existing 5 LNG tanker contract extensions to be relatively low.

• Nevertheless, the IRRs should be around 12% in order to meet MISC existing minimum threshold. Based on 12% IRR we expect a value add of RM385m or 10sen/share.

• LNG tankers are expected to continue face oversupply situation at least for the foreseeable upcoming 3 years, given the continued delivery of newbuild LNG tankers (currently is already oversupplied), while LNG production projects are facing delays due to technical issues as well as lower project IRRs (in tandem with the slump in global energy prices).

Risks

• Continued oversupply of LNG and chemical ships.
• Lack of new contracts for MMHE and Offshores.
• Slow recovery of global economy.

Forecasts

• At this juncture, we are maintaining our forecasts pending further information from management.

Rating

HOLD

Positives

• Strong rebound in Petroleum tanker charter rate.
• Strong support from Parent Group, Petronas.

Negatives

• Continued oversupply of LNG and chemical tanker.
• Low order-book replenishment by MMHE.

Valuation

Maintained HOLD recommendation with higher target price of RM7.50 (from RM7.40) based on SOP.

Source: Hong Leong Investment Bank Research - 24 Feb 2015