We joined an engagement session hosted by MISC’s top brass. We left the session feeling positive on the group’s prospects. Management expects a busy 2H19 for the group on the back of their maiden job wins. Mero 3 – FPSO ITB came out in July and expected submission in mid-Dec. MISC have secured partners for the EPC portion and is now working on securing the funding. Management guided that the award, should MISC bag it, will only come in late 1Q20. Maintain our earnings forecast, HOLD call and SOP-derived TP of RM6.99.

We joined an engagement session hosted by MISC’s top brass; Group MD and president, Mr. Yee Yang Chien and VP’s from finance – Mr.Raja Azlan Raja Azwa and corporate planning - Mr. Emran Othman. We left the session feeling positive on the Group’s prospects moving forward. The following are some of the key takeaways:

Recap. 2Q19 core earnings of RM409.4m (-13% QoQ, +27% YoY) brought 1H19 sum to RM878.7m (+39% YoY). The results were within both ours and consensus expectations at 51% of full year estimates. Second interim dividend of 7.0 sen/share (ex-date: 27 Aug, payment date: 18 Sep) was declared, as expected (vs 7 sen in 2Q18).

Midterm outlook. A lot of projects last year will be delivered by Nov (2 shuttle tankers won in 2017 will be delivered in Oct; however we won’t see meaningful contributions until 2020). Next year, 5 more shuttle tankers will contribute on a full year basis. The group has a mezzanine of assets coming into service in 2020-2022 thus boosting operating cash flows.

Job flows chunky in FY19. 1H19 was a slow period as very few tenders came to the market (ITB’s never came out). However in the past 2 months a lot of things came to life as all invitations to bid became official. Management guided that MISC should have a busy finish in Dec.

Project wins. In FY19, MISC has a capex target of USD1bn (FY18: USD970m), with a very strong chance of securing a sizeable job for their shipping division come Oct. We understand that the combined tender book for the Group is c.USD4bn at this juncture. With respect to the Libra field (Brazil) Mero 3 – FPSO, the ITB came out from Petrobras in July (USD2bn investment and a 22 year tenure) and will be submitted mid-Dec. MISC has secured partners for the EPC portion and is now working on securing the funding. Management guided that the award outcome will only come in late 1Q20.

Petroleum shipping. The lightering business is a recurring business, but will shrink over time given the race to develop terminals with VLCC offloading capabilities as well as pipelines in the Gulf of Mexico. 5 years ago when shale oil became a phenomenon, management already took a stance that the lightering business had entered its sunset phase. MISC will right size ahead of time, however for now, it is benefitting from export lightering side given that the USA is now an exporter of oil.

Forecast. Unchanged. Greenfield FPSO projects remain the growth focus for its offshore segment; however at this juncture we do not factor any project wins in the near term pending crystallization of bids.

Maintain HOLD and TP of RM6.99. Maintain our SOP-derived TP of RM6.99. Note that MISC’s operating cash flow has improved 45% YoY in 1H19 on the back of stronger earnings. That said, we believe MISC will maintain its DPS at 30 sen this year (flat YoY) for expansionary capex, implying a dividend payout of 78% yielding 4.2%.

Source: Hong Leong Investment Bank Research - 5 Sept 2019