Expecting a Seasonally Stronger 4Q

MISC’s 3Q19 was in line with our expectations. 9M19 profit improved 18% yoy driven by higher LNG vessels contribution and a recovery in petroleum rates. We raise our target price to RM8.40 (from RM6.82) factoring in the recent LNG awards and prospective wins (Mero-3 and 2 new LNG tankers). We maintain our Hold rating as we believe that current valuations have already priced in a significant amount of new prospective contracts.

Better Petroleum Margins; Heavy Engineering Saw Losses Narrow

3Q19’s core PATAMI came in at RM321m, bringing 9M19 profit to RM1.2bn (+18% yoy). The stronger results were attributable to the additional 2 LNG vessels that MISC took delivery in December 2018 and January 2019, supported by a recovery in petroleum freight rates. 9M19 results met our expectations but missed consensus, making up 70%/65% of full-year estimates. We expect the upcoming seasonally high 4Q petroleum tanker rates and narrowed losses from its chemical tankers from the progressive disposal to drive group profit.

Still Busy Bidding for Jobs

MISC has secured four new LNG vessels, which will only contribute to earnings from 2022/2023 onwards. MISC’s prospective tender book currently stands at ~US$5bn, of which the largest portion consists of Petrobras’ US$2bn Mero-3 and US$700m Limbayong projects. The group is also looking to secure a few more contracts in the tanker division. Some of these prospects are likely to materialize in the coming months.

Positive Outlook Priced in Despite Higher Target Price

We trim our FY19 EPS slightly by 3% to reflect the slower-than-expected recovery in petroleum segment. We revised our key valuation assumptions by raising our EV/EBITDA multiple for Offshore to 10x (from 7x), in line with global FPSO peers which have re-rated recently, but maintain both LNG and Petroleum at 10x and 7x. Our valuation upgrade also takes into account new project wins - Mero-3 FPSO and 2 LNG tankers (assume US$400m capex, IRR 12%). All things, positives are already priced into the stock, but we maintain our Hold call, given prospective positive newsflow.

Source: Affin Hwang Research - 14 Nov 2019