MISC announced that it has signed an agreement with 2 Japanese outfits (Mitsubishi & NYK) to co-own 2 new build LNG vessels, each with a capacity of 174,000 cubic meters on a time charter over 18 years. We estimate that MISC’s interest amounts to c.20%-25% in these 2 vessels and an estimated MISC equity contribution of USD18-20m. Our FY21 earnings inch up by 1.2%, we maintain HOLD call with a higher SOP based TP of RM7.06 (from RM6.99) as we factor in these 2 vessels into our valuation.

NEWSBREAK

MISC announced that it has signed an agreement with Mitsubishi Corporation and Nippon Yusen Kabushiki Kaisha (NYK) to co-own 2 new build LNG vessels, each with a capacity of 174,000 cubic meters. Each vessel will serve Diamond Gas International Pte Ltd on a firm 18-year time charter contract, for LNG shipping from US and Canada. MISC’s interest in the contract is USD201.6m. The vessels are currently being built by Hyundai Samho Heavy Industries and are expected to be delivered in 2021, upon which the time charter contract will commence upon delivery.

HLIB’s VIEW

Additional recurring income. This is not a total surprise, as the market was expecting news flow from MISC for its shipping business. Assuming a market charter rate of USD80,000 per day, and MISC’s portion of the contract value of USD201.6m (translating to a DCR of c.USD17,000), we estimate MISC’s equity stake in this venture to be within 20%-25%. Assuming debt to equity ratio of 80:20 and a stake of c.25% in the entity holding these vessels, we estimate that MISC’s equity investment for the associate stakes in these vessels to amount c. USD18-20m. This will barely put a dent to its balance sheet. Net gearing as at 1H19 stood at 0.21x with a cash balance of RM6.7bn. Overall, this is positive to MISC in generating additional recurring income for its LNG segment which remains its bread and butter.

Forecast. Our FY19-20 forecast remains unchanged whilst our FY21 earnings inch up by 1.2%.

Maintain HOLD, TP increases to RM7.06. Our SOP-driven TP increases to RM7.06 (from RM6.99) as we factor in the incremental effect of these 2 LNG vessels to our SOP. Maintain HOLD recommendation on the counter. Based on management’s capex target of USD1bn for FY19, this acquisition seems underwhelming or perhaps a pre-cursor to a busy finish. The stock has a dividend yield of 3.9% assuming MISC maintains its dividend payout of 30sen/share.

Source: Hong Leong Investment Bank Research - 25 Sept 2019