MISC’s 51% owned JV with PTSC has secured a 7-year FSO time charter contract from IKC worth USD176m. Despite the contract enhancing its recurring income, the impact to bottomline is rather minimal at only 0.5% of our FY19 earnings. While keeping our earnings estimates, we maintain HOLD call on the stock with unchanged SOP-driven TP of RM6.17 as near term earnings weakness would be cushioned by strong balance sheet (net gearing of 0.19x as of 2QFY18) and dividend yield of 5.1%.

NEWSBREAK

MISC announced its 51%-owned joint-venture with PetroVietnam Technical Services Corporation (PTSC), has been awarded a 7-year time charter contract worth USD176m by Idemitsu Kosan Co. Ltd. (IKC) for the provision of a floating storage and offloading vessel (FSO). The charter is expected to commence by mid-2020 for the Sao Vang and Dai Nguyet Development Project in Blocks 05-1b and 05-1c offshore Vietnam.

HLIB’s VIEW

Additional recurring income. This is not a total surprise to the market as it has been reported by Upstream in mid-October. However, the firm contract value is much lower than the initial estimate provided by the news portal of between USD220-250m. While this contract win is positive to MISC by generating additional recurring income for its offshore segment, we reckon that the project IRR could be around 7% assuming capex at USD110m. The estimated net USD55m capex requirement borne by MISC would be still within management’s guided growth capex target of USD600m in FY18. However, the share of profit from this project is rather minimal, contributing only 0.5% of our FY19 earnings estimates. Meanwhile, we do not discount the possibility that the conversion job could be awarded to its fabrication arm, MMHE.

Expect weaker earnings in FY18. No changes to our earnings estimate given that the impact to the bottomline is minimal. Note that MISC will be releasing its 3QFY18 earnings results by mid-November.

Maintain HOLD, TP kept at RM6.17. Our SOP-driven TP is kept at RM6.17 as the incremental impact to our offshore valuation is also minimal given the estimated IRR of this project win is equivalent to our WACC assumption of 7%. All in, maintain HOLD recommendation on the counter as near term earnings weakness would be cushioned by strong balance sheet (net gearing of 0.19x as of 2QFY18) and dividend yield of 5.1% should MISC is still maintain its dividend payout of 30sen/share.

Source: Hong Leong Investment Bank Research - 30 Oct 2018