We were recently updated with more detailed terms on the new LNG vessels orders as well as the charter renewal of five Puteri Class LNG carriers by the management. The subdued level of LNG charter rates is spilling into 2015, but petroleum charter rates continue to strengthen on the back of low crude oil prices. In view of the removal of non-renewal risks, mid-term earnings growth boost from new vessels orders and the stronger petroleum charter rates, we upgrade MISC to MARKET PERFORM (from UNDERPERFORM) with higher Target price of RM8.70 (from RM7.49).

Petroleum momentum sustained. Charter rates in the petroleum segment sustained its rally into the start of the year with the spot rates surging >30% from 4Q14 rates as low crude oil prices spurred demand for tankers to carry cargoes. As the division managed to break even from losses in 4Q14 with the rates back then, we believe the division can return to the black on a full-year basis, considering that our in-house crude oil assumption of USD57/bbl suggests that the higher charter rates can be sustained. Thus, we revise our charter rate assumption in the petroleum segment higher by 3%-5%

More LNG carriers in the pipeline. To recap, MISC has entered into a novation agreement with Petronas and Hyundai Heavy Industries for the construction and delivery of five newbuild LNG carriers, which will involve CAPEX of USD1.1b (RM3.9b) or USD220m (RM770m) per vessel which is in line with industry prices. Management guided that two newbuilds will be delivered in 2H16, one in 1H17 and two more in 2H17. While the charter rates are undisclosed, we are imputing USD75k/day assumption into our earnings model. Thus, we are expecting yearly revenue contribution of c.RM430m and yearly PBT of c.RM215m (RM43m per vessel) once all the new vessels are operational.

Non-renewal risk eliminated. The concern on the five Puteri Class LNG carriers not being renewed was alleviated after Petronas LNG agreed to extend the charter for another 10 years. The vessels will undergo refurbishment which we understand will cost CAPEX of c.USD150m (RM525m) and be re-chartered subsequently (three in 2H15, one in 2H16, one in 2H17). We assume USD70k/day for the renewal charter rate, which translates into full-year revenue and PBT contribution of RM81m and RM40.5m per vessel. With regards to financing, total CAPEX commitment (including new vessels) is expected to lift the net gearing to 0.3x from 0.14x as of FY14, which is still within the manageable range.

LNG and Petroleum in contrasting states. The subdued LNG charter rate continued into 2015, with February time charter (TC) rate slumping 18.2% MoM while the spot rate also recorded decline of 4.9% MoM on the back of growing vessel supply in the global LNG market. However, the charter rate in the petroleum segment strengthened further since the start of the year with January spot charter rates surging between 30.3% and 46.2% across various vessel types, mainly due to the stocking-up activities thanks to low crude oil prices. Meanwhile, charter rates in the chemical segment remained weak on account of slowing global economic growth.

Earnings forecast upgraded. As a result of higher charter rate assumption in petroleum division and the additional contribution from newbuilds and charter extension of the five LNG vessels, we upgrade our FY15E-FY16E earnings by 21.0%-32.2%. Upgrade to MARKET PERFORM (from UNDERPERFORM) with higher Target price of RM8.70 (from RM7.49). Correspondingly with the upward earnings revision, we upgrade our TP to RM8.70 by ascribing a higher PB ratio of 1.3x (from 1.2x), above its 5-year mean as we believe the stock deserves higher valuation following the removal of an immediate risk in the charter extension. Midterm earnings growth is also boosted by the new vessels orders while net gearing stood healthy at 0.14x as of FY14. Our TP implies 16.4x FY15E PER, which is between the range of 15x to 24.4x Fwd PER we applied on Petronas-linked stocks. 

Source: Kenanga Research - 6 Apr 2015