News

In an announcement to Bursa Malaysia, MISC has entered into an Agreement for Sale and Purchase of Shares with PETRONAS for the acquisition of the latter’s entire equity interest in Petronas Maritime Services Sdn Bhd (PMSSB) for a cash consideration of RM54.1m.

The principal activities of PMSSB are the provision of maritime services and consultancy and maritime audit. The exercise is expected to be completed by 7th July 2015.

Comments

We are neutral on the Related Party Transaction (RPT) as the potential earnings impact is minimal based on PMSSB’s latest net profit of RM14.1m, representing a mere 0.6% of MISC’s FY15E net profit. The acquisition price appears to be fair as it translates into FY15 PER of 3.8x and PBV of 1.55x.

We understand that PMSSB is a fleet management arm of Petronas which provides maritime services and consultancy. The exercise will complement MISC’s existing business and service range and enhance MISC’s position as a service provider.

We foresee no issue in funding as the acquisition price of RM54.1m is only 0.2% of MISC’s equity value while net gearing stood healthily at 0.16x as of 3Q15.

Outlook

Near-term earnings growth should be supported by the petroleum division thanks to the favourable charter rates driven by countries stocking up oil inventory and limited fleet growth. Meanwhile, non-renewal risk of Puteri Class vessel has been eliminated with an agreement with Petronas to extend the charter for another 10 years.

Over the longer-term, we expect the earnings growth to be sustained by the construction and delivery of five newbuild LNG carriers, which will involve CAPEX of USD1.1b (RM3.9b) or USD220.0m (RM770.0m) per vessel.

Forecast

We made no changes to our earnings forecasts as the potential earnings impact from the acquisition is immaterial.

Rating

Upgrade to OUTPERFORM from MARKET PERFORM as we see value emerging.

We upgraded our rating on MISC as we believe that its growth potential is intact with the petroleum division expected to offset the weakness in LNG division while net gearing is also healthy for funding its fleet expansion.

Valuation

We maintain our Target Price of RM9.35, based on 1.3x FY16E PBV, slightly above its 5-year mean PBV. The TP implies 16.4x PER FY16E which is within the range of 16.0x to 25.5x Fwd PER that we applied on Petronas-linked stocks.

Risks to Our Call

Lower-than-expected charter rates.

Worse-than-expected slowdown in global economy.

Source: Kenanga Research - 16 Jun 2015