We recently participated in a conference call with the CEO of MISC and we remain upbeat about its long-term prospects with its energy transition plans to achieve carbon neutrality. We also believe that recent increases in freight rates from higher global oil production is likely to continue with the recovery of the US and Europe economies from Covid-19. Maintain BUY at unchanged SOP-derived TP of RM7.69.

The Following Are the Key Takeaways From Our Recent Meeting With Management:

Energy transition for the shipping industry, upcoming IMO regulations for 2023. MISC believe that ship players have been given enough time to adjust to the IMO regulations and there is ample time for everyone to prepare for it. MISC is in the midst of a very intensive review to establish proper checks on its ships and believes that there will be certain ships that will not be able to meet certain benchmarks and there can always be certain optimization criteria that can be met to reduce carbon emissions. It will continue its shift towards LNG dual fuel ships and will retire new ships which will be too costly for retrofit. Recall that MISC has been disposing its old aframax from AET which are aged more than 15 years to comply with the regulation. MISC was ready for the sulphur cap implemented in FY20 and it believes that it can meet those targets set out by IMO. Its energy transition footprint would be premised upon selling old vessels and building new vessels which are more carbon neutral.

LNG dual fuel ships are here to stay. MISC has taken a view that LNG dual fuel ships would continue to have its influence in the next 25 years or more and the Company believes that there is ample time to extract the maximum benefits until 2050. MISC opines that it is not possible to achieve zero carbon by 2050 for all kinds of ships but every new ship that gets build post 2030 should ideally be focusing on zero carbon emissions, using the most efficient technology possible and there will be a 20 year window for the global shipping industry to transition into zero carbon emissions. Ammonia engine would be the one of the key goals for the future for its ships and it will continue to look at various avenues of technologies or opportunities to embark on. MISC has reiterated that it would not explore on other opportunities that it is not specialized at like doing things on shore. It will look at avenues to make a shift into hydrogen based engine.

Freight rates. Freight rates are not expected to reflate to levels seen in 2019 or 2020 despite the improvements seen in the last couple of months. Higher freight rates would be premised upon higher crude oil production and the recent easing of production cuts from OPEC+ is a positive step forward for the freight market. MISC will continue to focus on resizing and rebalancing its asset portfolio to continue to have the right asset class to continue its strong cash flows.

Capex. Not looking at making significant capex in FY21. Capex spent this year would primarily come from previously announced projects. MISC’s main focus would be on its conversion of its list of tankers that is currently under construction. The company wants to be sure that it can bring these assets to water to start generating cash. Capex in FY22 will be primarily attributable to the ongoing capex for Mero 3 and couple of shuttle tankers from AET.

Outlook. We believe that the shipping industry has reached its trough with regards to freight rates and we expect it to improve sequentially until the end of FY21. Our expectations on sequential freight rate increases are premised upon (i) recovery of the US and European economies from Covid-19, (ii) higher demand for crude oil and (iii) higher global production of crude oil and higher refinery run rates. We believe that the increased demand coming from US, Europe and China for freight activities would more than offset the weakness from India, which is experiencing an exponential increase in Covid-19 cases. We opine that the recent uptrend in crude oil prices and higher production from OPEC+ are also leading indicators towards the positive outlook on the sector.

Forecast. Unchanged.

Maintain BUY with unchanged SOP-derived TP of RM7.69. We maintain our BUY rating leaving our SOP-derived TP of RM7.69 unchanged as we view that the shipping industry is turning for the better. We opine that oil demand and freight activity has already started to pick-up, in tandem with O&G and the global economy.

Source: Hong Leong Investment Bank Research - 2 Jun 2021