Highlights/ Comments

• The management of MISC has established a 5-year strategic growth plan until 2020, focusing on 3 core business segments – 1) Petroleum Shipping; 2) Offshore – FPSO/FSO; and 3) LNG Shipping. Management expects organic and inorganic growth for near term 2015-2017 (mainly on Petroleum and FPSO) and organic growth for 2018-2020 (mainly on FPSO and LNG).

• Petroleum Charter rate is expected to be resilient with sustained profitability for upcomi ng years. The group’s aframax fleet is leveraging on the encouraging charter rates within the Carribean and US Gulf oil trades (primary on trades within North and South of America continents). US is expected to liberalize its oil export market, allowing cont rolled export within America continents in the near future. Management looks forward for potential fleet expansion (secondhand market or newbuild) given the expected sustaining favourable charter rates (for 2016-2017) with current low asset prices.

• FPSO Limited default and impairment risk, given the existing contracts are protected by long term agreements with strong clientele portfolio. Management anticipates potential brownfield acquisition in 2016-2018 at bargain prices, as FPSO/FSO asset owners restructure their business portfolio.

• LNG Despite the slump in LNG charter rate, MISC earnings is relatively secured through their long term contracts. Expect earnings growth by 2018 with the deliveries of 5 new LNG ships (chartered to Petronas). The growth in LNG shipping market will be driven by Petronas projects and the development of shale gas in US.

• Potential higher dividend payout from the proceeds of VTTI disposal for US$830m (RM3.5bn) by 2016. MISC guided US$500m capex requi rement for 2016. Note that MISC does not have debts related to VTTI stakes at holding company.

Risks

• Oversupply of LNG, petroleum and chemical ships, depressing charter rates.
• Increase in bunker cost.
• Slow recovery of global economy.

Forecasts

• Forecast unchanged pending completion of VTTI disposal.

Rating

BUY

Positives

• Resilient 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

• Maintain BUY recommendation with unchanged Target price of RM9.00 based on SOP.

Source: Hong Leong Investment Bank Research - 23 Sep 2015