MISC has been awarded six long-term time charter contracts by STL for six new build VLEC shuttle tankers with a capacity of 98,000cbm each. The vessels were purchased by MISC for approximately USD726m and chartered to STL for a firm period of 15 years. We maintain our BUY rating with an SOP-derived TP of RM8.98, leaving our earnings assumptions unchanged despite its c.15% increase in LNG capacity as we believe that softer LNG and Petroleum charter rates are expected to offset the extra contribution arising from the aforementioned contracts secured.

NEWSBREAK

MISC has entered into a Memorandum of Agreement (MOA) with Zhejiang Satellite Petrochemical Company (STL) for the purchase of six newbuild 98,000cbm Very Large Ethane Carriers (VLEC). Concurrently, MISC has entered into Time Charter Parties (TCP) with STL for the charter of six vessels for operations in international waters. Pursuant to the MOAs and TCPs, the vessels will be purchased by MISC for approximately USD726m and chartered to STL for a firm period of 15 years. The charters for the Vessels are expected to commence in 4QFY20. Samsung Heavy Industries and Hyundai Heavy Industries will be constructing three vessels each.

HLIB’s VIEW

Expansion of LNG capacity. The six contracts awarded by STL would increase MISC’s LNG capacity by c.15% and is expected to increase the sustainability of its earnings in the years to come.

Fall in LNG and Petroleum rates to offset positives from LNG capacity expansion in the near-term. LNG rates have soften in 2QFY20 and is still expected to be weak in 2HFY20 due to lower economic activity as a result of the COVID-19 pandemic. LNG deferrals have been happening since Asia was hit by the COVID-19 lockdowns and we believe that the demand destruction that has hit the LNG market in 1HFY20 will linger into 2HFY20. We also believe that the potential re-introduction of lockdown measures from countries which were hit hard by COVID-19 recently could also derail LNG demand further and cause further declines in its charter rates. Furthermore, the decline in Petroleum rates are also expected to act as an offsetting factor from the aforementioned contract awards; Petroleum rates have plunged significantly in May due to the recovery in oil demand.

Forecast. We leave our forecast unchanged in view of softer and volatile LNG and petroleum prices despite the aforesaid contract awards.

Maintain BUY with a TP of RM8.98. We maintain our SOP-driven TP of RM8.98. We believe that MISC would be able to weather through the fluctuations in charter rates for its LNG and Petroleum segment. Despite experiencing lower rates of late, its long term charter contracts for its LNG and Petroleum business would still be able to provide the Company with sustainable earnings

Source: Hong Leong Investment Bank Research - 16 Jul 2020