Yesterday, MISC announced that it has been awarded long term charter contracts by QatarEnergy for five 174.0k m3 newbuild Liquefied Natural Gas Carriers (LNGCs) to be built by Hudong-Zhonghua Shipbuilding (Group) Co. MISC will enter into a consortium with 3 other MNCs where each member will have an equal equity interest of 25% in each awarded LNGC. Based on our back-of-the-envelope estimates, this contract win will only will only improve MISC’s FY25f estimated earnings by less than 2% on a 25% stake. With that, we are only mildly positive on this development. Overall, we maintain HOLD on MISC with an unchanged SOP-derived TP of RM7.39/share.

NEWSBREAK

Yesterday, MISC announced that it has been awarded long term charter contracts by QatarEnergy for five 174.0k m3 new-build Liquefied Natural Gas Carriers (LNGCs) to be built by Hudong-Zhonghua Shipbuilding (Group) Co. This is in addition to the seven LNG long term charter contracts that was awarded back in 10 August 2022.

HLIB’s VIEW

Key highlights. We note a few key salient points, as below.

1) MISC will enter into a consortium with Nippon Yusen Kabushiki Kaisha (NYK), K Line and China LNG Shipping Holdings Limited (CLNG) where each member will have an equal equity interest of 25% in each awarded LNGC.

2) NYK, a company headquartered in Tokyo, Japan, is a global transportation company, operating a sizeable fleet of ocean vessels, planes and trucks. K-Line, a company headquartered in Tokyo, Japan, is a container transportation and shipping company while CLNG is a company specializing in LNG shipping, covering LNG transportation project research, investment, supervision and management of LNG carriers.

3) According to the announcement, the LNGCs will be employed by QatarEnergy under long-term charters from 2025 onwards. QatarEnergy is the state-owned energy company in the State of Qatar, and is involved in exploration, production, refining, transport, and storage.

4) From our findings, QatarEnergy has offered owners four options for the firm charter hire period – 10, 12, 15 or 20 years – with “options” to extend the period up to 25 years. We expect the commencement to begin soon as construction of these vessels usually take c.30 months.

5) ESG wise, based on our understanding, QatarEnergy plans to include carbon capture as part of its North Field expansion projects, and ships carrying LNG cargoes from these projects will have lower full-cycle carbon emissions.

6) With the assumption of: (i) daily charter rate of USD75.0k (due to comparatively smaller size of these vessels compared to Q-Flex and Q-Max LNG ships and the decline in long-term LNG charter rates in the last 10 years); and (ii) USD/MYR exchange rate of 4.5; and (iii) PBT margin of 30%, it will only improve MISC’s FY25f estimated earnings by less than 2% on a 25% stake. With that, we are only mildly positive on this development.

7) Based on our estimated assumptions of: (i) charter period of 20 years; (ii) capex per vessel of USD200m; and (iii) PBT margin of 30%, this signifies an IRR of ~7%.

Forecast. Unchanged.

Maintain HOLD, TP of RM7.39. With narrowed upside to our unchanged SOP derived TP of RM7.39, we maintain our HOLD call on MISC. We think that downside is supported for MISC due to its: (i) defensive nature of the name due to its portfolio of long-term charters which will provide consistent, recurring cash flows; and (ii) its relatively fixed dividend payout policy of 33sen/year. This translates into a decent dividend yield of 4.6% annually based on current share price.

Source: Hong Leong Investment Bank Research - 4 Nov 2022