News/  Comment

• MISC has entered into share sale agreement to acquire 50% stake in GKL – (Gumusut Kakap Semi-Floating Production System Limited) from EPV (100% owned by Petronas) for cash consideration of US$445.0m (RM1,849m), to be finance via internally generated funds.

• Back in Dec 2012, MISC sold 50% stake of GKL to EPV for US$305.7m (RM934.4m) under a restructuring exercise (See Figure #1), which MISC also received additional cashflow of US$1,426.6m (RM4,360.4m) via borrowings from Petronas to GKL (disbursed to MISC), used to pare down MISC’s high debt level (RM14.4bn back in 2012) and finance capex for its offshore segment (See Figure #2).

• Gumusut-Kakap is a semi-submersible floating production system with production capacity of 150,000 bbl/day of crude oil from subsea wells and injection capacity of 300mmcfd of gas and 225,000 bbl/day of water. It is currently under a long term lease to the client, which will expire 25 years from commencement of commercial production in October 2014.

• Based on its audited account ended Dec 2015, GKL made a net profit of US$114.2m (RM445.9m) and EBITDA of US$137.6m (RM537.3m). The net asset was US$1,290.2m (RM5,540.1m).

Positives

• on the acquisition exercise as it will strengthen MISC earnings going forward. We believe the acquisition price is fairly valued at US$445.0m, given the lowered debt level of GKL since 2012. The exercise is expected to complete by 2Q16, pending approval through EGM. 2012 Value (US$) 2015 Value (US$) Disposal Price 305.7m Acquisition Price 445.0m Debt Assumed (50% ) 713.3m Debt Assumed (50% ) 530.0m Total 1,019.0m Total 975.0m Financial Impacts

• Net debt is expected to increase from RM850m to RM7.2bn accounting for cash disbursement of RM1.85bn and consolidating GKL’s debt of RM4.55bn (net gearing increase to 19.4% from 2.4%). MISC will also recognize one-off gain through negative goodwill of RM919.1m from the exercise.

• MISC will also recognize higher earnings from the consolidation of GKL’s earnings (vs. existing practice of 50% JV contribution).

Risks

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

Forecasts

• Unchanged, pending shareholders’ approval.

Rating

• Buy

Positives

• 1) Strong rebound in Petroleum tanker charter rate; and 2) Strong support from Parent Group, Petronas

Negatives

• 1) Continued oversupply of LNG and chemical tanker; and 2) Low order-book replenishment by MMHE.

Valuation

• Maintained BUY with unchanged target price of RM10.00 based on SOP.

Source: Hong Leong Investment Bank Research - 25 Feb 2016