News

• Sabah Shell is counter claiming against GKL (Gemusut Kakap FPS) for the sum of US$583m for alleged defective work and limited functionality of the Offshore floating asset.
• To recap, GKL had previously claimed for variation works via Adjudication Proceedings for a sum of US$440m in total and was awarded a favourable decision by court back in February 2017.
• MISC has maintained its view on the claims and will continue to resist and defend against Sabah Shell’s counterclaim during the course of Arbitration Proceedings. Financial Impact
• Overall a negative surprise to us as the sum of the counterclaim would more than offset the group’s gains from its previous claim against Sabah Shell. Potential impact to its bottom line is still uncertain as the merits of the claim are still being assessed by the company.
• However, we take comfort from the fact that the contract under GKL provides a Limitation of Liability clause which limits GKL’s total liability to Sabah Shell to a maximum amount of US$200m.
• In addition, we do not expect immediate cash flow impact for the group even if the counterclaim is successful. IIn such instance, it would only pay back Sabah Shell through reduction in lease rates of the GKL contract in contrast to a lump sum payment.
• No impact for our forecast as we have not factored in the additional lease rates to account for the variation works previously to remain conservative.

Pros/Cons Outlook:

• LNG: The group is expecting 1 LNG vessel to be delivered in 2H17. We expect a flattish performance for LNG division in 2017 as new charters replace the loss of income from more profitable expired contracts on Puteri class vessels.
• Tanker: 2017 is expected to be a rather flattish year for this division. Demand outlook has improved slightly post OPEC cut as more US exports into Asia has increased overall tonne-mile demand. However, high fleet growth will continue to put pressure on overall tanker rates.
• Offshore& Heavy Engineering: Heavy Engineering will continue to be marginally profitable while Offshore would improve slightly in 2017 due to full year recognition of GKL and improvement in charter rate of GKL post successful VO claim.

Risks

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

Forecasts

• Earnings forecast maintained.

Rating

HOLD (↔ )

• Earnings headwinds persist with Petroleum tanker rates expected to remain depressed this year while its LNG division would face long term headwinds as its long term charters come to expiry while new LNG contracts are significantly less profitable.

Valuation

• We maintain our SoP-driven TP at RM7.52.

Source: Hong Leong Investment Bank Research - 05 Jun 2017