A weaker economic environment could unveil several risks, which prompts us to reaffirm our SELL rating on MISC. We foresee lower LNG yields on the back of downward revision of existing contractual terms or outright non-fulfilment of contracts. Meanwhile, in the event of a production cut, following a ceasefire between Saudi Arabia and Russia, tanker rates could weaken in 2H20 on the back of more favourable oil-market dynamics. We maintain our SOTP-based 12- month target price of RM6.20.

LNG Force Majeure and Revision in Contract Pricing Pose Risks

The LNG segment (66% of 2019 core PBT) could pose some downside risks to earnings. As at 31 December 2019, MISC owned 29 vessels which are mostly long-term contracted to Petronas. Contracts for two of its vessels are expected to expire in 2Q/3Q20, with another two in 1Q21 with an extension option. A weaker charter vessel market rate does not bode well with the vessels set to expire. In addition, around the world we have seen China and India trying to invoke a force majeure on LNG vessels as demand weaken. LNG importers are also calling for a new long term contractual term for existing contracts which could pose risks to earnings.

Petroleum Unlikely to Benefit Much

A potential deal involving Saudi Arabia, the US and Russia in the coming weeks or months should lead to lower oil production. This would have a negative impact on petroleum tanker demand and lead to lower charter rates. Weaker oil production will also likely translate to smaller inventory build when demand gradually recovers, resulting in a lesser need for offshore storage. In the near term, we do not expect MISC to benefit much from higher tanker rates as its portfolio mix is weighted towards term vs. spot at 78:28. Moreover, all of its VLCC vessels are already committed to long-term contracts.

Current Share Price Does Not Reflect the Risks

MISC is trading above its long-term mean PER and not reflective of the growing downside risk especially for its LNG segment, in our view. We make no change to our SOTP-based 12-month TP of RM6.20, which implies a 2020E PER of 16x, slightly below the past-15-year average. Key upside risks to our call include: (i) a rebound in global oil prices; (ii) mass deferment of vessel deliveries; and (iii) higher-than-expected tanker yields.

Source: Affin Hwang Research - 8 Apr 2020