News

In an announcement to Bursa Malaysia, MISC through its wholly-owned subsidiary, MTTI entered into an agreement to sell its 50% stake in VTTI B.V. (VTTI) to Vitol Investment Partnership Limited (Vitol) for USD830.0m. Vitol is the shareholder of the remaining 50% stake in VTTI.

VTTI was founded in 2006 and is a provider of energy storage worldwide and its principal activities are owning, operating and managing a network of oil product storage terminals and refineries in five continents and 11 countries. As of FY14, VTTI owns and operates a total of 8.1m cbm in tank capacity.

The disposal is expected to be completed within six months from the date of the agreement.

Comments

We think that it is a good deal for MISC as the disposal price of USD830.0m translates into FY14 PER of 39.7x and PBV of 1.28x. Based on our forecasts, the implied FY15E forward PER is 32.9x which is higher than the domestic Malaysian tank terminal player, Dialog (Historical: 26.0x, Forward: 21.0x) and European peer - Royal Vopak N.V. (Historical: 18.0x, Forward; 15.0x).

To quantify the earnings impact, the earnings contributions from VTTI in our forecasts are 4% in FY15 and 3.6% in FY16. Based on the carrying value of MISC’s investment in VTTI as at 30 June 2015, the estimated disposal gain to MISC is c.USD 9.1m. Upon completion of the disposal, VTTI will cease to be a joint-venture company of MISC.

We are positive on the move as we concur with the rationale behind the disposal the Group cited which was to focus on core business and unlocking the value of investments. As for the proceeds of USD 830m (or RM3.5b based on the latest exchange rate of 4.17x), MISC intends to utilise the funds to pare down its borrowings, funding capex and for opportunistic investment moving forward.

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.

We continue to like MISC with earnings forecasted to grow 20.1% and 11.5%, respectively, over the next two financial years. The Group is also in a healthy balance sheet position with net gearing at 0.14x as of 2Q15 which provides further gearing room should any investment opportunities arise.

Forecast

We made no changes to our earnings forecasts pending the completion of the disposal.

Rating

Maintain OUTPERFORM

Valuation

We maintain our Target Price of RM9.26, based on 1.3x FY16E PBV, slightly above its 5-year mean PBV. The TP implies a 15.9x PER FY16E.

Risks to Our Call

Lower-than-expected charter rates.

Worse-than-expected slowdown in global economy.

Source: Kenanga Research - 24 Aug 2015