News

In an announcement to Bursa Malaysia, MISC through its whollyowned subsidiary, AET Inc. Limited (AET) has signed shipbuilding contracts with Samsung Heavy Industries Co Ltd (SHI) for the construction of four new 113,000 dead weight tonnes (DWT) Aframax vessels, two new 114,000 DWT LR2 product vessels and two new 158,000 DWT Suezmax vessels.

The LR2 and Suezmax vessels are to be delivered in 2017 while Aframax vessels are to be delivered in 2018. The combined value of the contracts is approximately USD 500m (RM2.1b, based on USD: RM4.26).

The Aframax and Suezmax contracts are entered into as part of AET’s on-going fleet renewal plans, whereas the two LR2 product vessels are tied to long-term time charters which AET has been awarded with a strategic oil major client.

Comments

We are not surprised by the fleet expansion due to the positive charter rates trend of the petroleum segment with the time charter rates surging 35%-58% YoY as of 1H15. Besides, healthy balance sheet position (net gearing at 0.14x as of 2Q15) has also provided room for the Group to explore investment opportunity while recent movement of disposing non-core business has paved the way for MISC to commit to its core business.

As of 2Q15, MISC was operating 81 vessels (55 owned) with various capacities under the petroleum division. The new orders represent c.10% addition to the numbers of fleets the Group is operating. The value of USD 500m is reasonable based on the market price. Funding should not be an issue as the amount of RM2.1b is only 6.6% of its FY16E book value. Net gearing should stay at 0.1x level in FY16 after taking into account the latest expansion plan in view of the potential cash proceeds amounting to USD830.0m (RM3.5b) arising from the disposal of 50% stake in VTTI.

We are positive on the expansion as it signals the Group’s intention of focusing in core business while also riding on the positive momentum of the petroleum charter market. To quantify the financial impact, we forecast the new fleets to contribute USD71.6m (RM305.0m) and USD10.7m (RM45.6m) of revenue and PBT, respectively per annum, to MISC once delivered, based on the current market charter rates. For illustration purpose, the contributions represent 3% and 1.6%, respectively, of our FY16E revenue and PBT forecasts.

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, nonrenewal 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 or USD220.0m 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 forecast as the delivery date of the new vessels is beyond our forecast horizon.

Rating

UNDER REVIEW. Previous rating was OUTPERFORM.

Valuation

Our TP is UNDER REVIEW pending the release of 3Q15 results next week. Previous TP was RM9.26, based on 1.3x PBV FY16E. Our rating has negative bias as we think that we are unlikely to change our earnings forecasts and thus TP.

Risks to Our Call

Lower-than-expected charter rates.

Worse-than-expected slowdown in global economy.

Source: Kenanga Research - 29 Oct 2015