Selling 50% of the Gemusut Kakap Semi FPS. MISC announced that it is disposing of the  currently-constructed  Gemusut  Kakap  floating  production  system  (FPS)  to  GKL (Gemusut Kakap Semi sub FPS Limited) for a total of USD2.038bn (RM6.23bn), which is the total construction cost of the asset. The amount will be satisfied via the issuance of 611.4m new GKL shares (at USD1 per share) by GKL to MISC and USD1.427bn in cash for the amount owing to MISC to cover the construction costs. It is understood that GKL  will  obtain  a  loan  from  Petronas  to  repay  the  amount  owed  to  MISC,  which  will dispose  of  50%  of  its  equity  in  GKL  to  Petronas  Carigali  for  a  cash  consideration  of USD305.7m (RM934.4m). Upon completion of the proposed share disposal, GKL will be jointly-owned  by  MISC  and  Petronas  based  on  a  50:50  split.  GKL's balance sheet  will not  be reflected in MISC's books while  only  50%  of  its  bottomline  will  be  factored  into the latter's net income and associate line under the equity method of consolidation. The total cash proceeds from this deal to MISC is a whopping USD1,732.3m (RM5.29bn).

The  rationale.  The  Gemusut Kakap  Semisubmersible FPS is by MISC's single largest investment.  The  asset  monetization  is  to  raise  liquidity  and  strengthen  the  company's balance  sheet  profile,  becoming  fiscally  able  to  absorb  losses  from  its  on-going  loss-making  petroleum  and  chemical  tanker  divisions.  This  will  also  potentially  create opportunities for acquisitions in its ailing tanker shipping segment, which we only expect to recover sometime in 2014.
 
Paring down net gearing and interest cost. With Petronas absorbing half of the debt's interest at GKL's level (supposedly at much lower rate), this will ultimately lower MISC' overall  interest  cost.  We  understand  the  FPS  will  be  leased  to  Shell  once  it  becomes operational  by  2Q2013,  while  MISC  will  raise  funds  by  seeking  a  long-term  debt structure.  MISC  intends  to  utilize  USD1.25bn  (RM3.82bn)  to  pare  down  its  RM14bn borrowings from the proceeds, and allocate the remainder for working capital purposes. This exercise would improve MISC's net gearing to 46% from our prior forecast of 56%, and reduce interest costs by RM152m per annum for FY13 and FY14. 

Brief details on Gemusut Kakap FPS.  The Gemusut Kakap Semisub FPS weighs approximately 37,500 metric  tones  and  is  capable  of  producing  150,000  barrels  of  crude  per  day  from  subsea  wells.  It  has  a capability  of  injecting  300  million  cubic  feet  of  gas  per  day  and  225,000  barrels  of  water  per  day.  The facility is designed to function as a deepwater facility in the South China Sea and is the first of its type in the  Asia  Pacific.  The  Semi-FPS  will  be  installed  approximately  1,200-meters  deep  in  offshore  Sabah, Malaysia  and  is  expected  to  be  delivered  to  the  client  by  mid-2013.  Over  the  mid-  to  long  term,  it  is expected  to  be  a  major  contributor  to  Malaysia's daily oil production levels, and may hit approximately 20% of daily national production in the future.
 
Earnings  impact. We  understand  that  its  other  peers  can  fetch  a  day  rate  of  a  conservative  USD400k, which  translates  to  revenue  of  RM445m  per  annum  and  conservative  earnings  of  RM88m  per  annum, implying a margin of 19.7%. The payback period of this rate is six years, in line with other rig charterers and operators. We are incorporating these earnings into our forecast, where FY13's contribution will only be 25% of the RM88m. As such, we raise our earnings forecast for FY13 and FY14 by 17% and 7%, due to the impact of lower interest costs and higher JV earnings.
 
Maintain BUY. Our FV, premised on a FY13 1.3x P/B, is raised to RM6.58 from RM6.45. We maintain our BUY call on MISC.   MISC is poised to see an earnings turnaround following the exit of the liner division and  we  think its stock  price has  hit  its bottom.  It is  currently  trading  at an  attractive  0.9x  P/B  vs  its  long term average of 2x since the past 10 years. Although its P/B has rerated to  1.5x since 2008, the stock is still trading below its 1 year average of 1.1x. Currently MISC trades at below -2 standard deviations since 2008.

 Source: OSK