MISC is disposing its equity interest in MISC Integrated Logistics Sdn. Bhd. (MILS) to Swift Haulage Sdn. Bhd. (SWIFT) for a purchase consideration of RM257.2m. We are quite positive on the announcement, as it will free up cash for MISC and allows the group to streamline its core business, while the disposal price at 1.0x PBV is deemed fair. No changes to FY16- 17E earnings as MILS’ contribution to the group is insignificant (<1%). Maintain OUTPERFORM and TP of RM9.64.

Streamlining its core businesses. MISC entered into a SPA of shares with SWIFT for the disposal of its entire equity interest of MISC Integrated Logistics Sdn. Bhd. for a purchase consideration of RM257.2m which comprises of 20.0m shares and 332.8m RCPS. (refer overleaf). The rationale for the proposed disposal is to allow MISC to unlock the value of its investment in MILS, which had been struggling (-82% PBT YoY) and it is also inline with MISC’s intention to streamline its core business, namely LNG, Petroleum and Offshore segments, which provide stability in earnings due to their long-term contract nature.

No surprises, long-term positive. We were not surprised with the proposed disposal, but rather positive with their move in disposing MILS, as management will be able to utilise the proceeds from disposal, i.e.RM257.2m cash, to focus on expanding its core business for better earnings stability. Assuming RM257.2m cash proceeds and repayment of MILS loans (RM66.8m), MISC’s net gearing could be transformed from 0.01x currently to net cash position in the near term. However, we are still expecting FY16E net gearing to increase to 0.10x post the acquisition of the remaining 50% stake in GKL.

Disposal value fair. On the valuation front, we believe the disposal price of RM0.73/share (based on total sum of RM257.2m, excluding shareholders loan and receivables) for MILS is fair as it implies a 1.0x PBV based on MILS’s latest BVPS of RM0.72 which is quite close to its peer in integrated logistics i.e. Tiong Nam Logistics which currently trades at 1.12x PBV.

No completion timeline, but we expect the disposal to complete by end FY16E. While there is no guided timeline on the completion of the deal from management, we estimate that the disposal will be completed by end FY16 as such transaction could easily take up to six months. Upon completion of the disposal, MILS will cease to be a joint-venture company of MISC (refer overleaf) .

Earnings. The disposal will not have any significant impact to earnings as the integrated logistics segment contributed <0.5% to MISC earnings over the last two years; as such, we expect <1% loss in income, while we estimate a gain on disposal of c.RM1.7m (0.1% of FY16E earnings), is also deemed as insignificant. Hence, we are maintaining our earnings forecasts for the group at RM2.9-3.2b in FY16-17E.

Maintain OUTPERFORM and TP of RM9.64. Our TP of RM9.64 is based on FY16E BVPS of RM8.38 and PBV multiple of 1.15x which is on par with +0.5SD over the 5-year mean. MISC’s share price was down 13% yesterday (providing 35% total returns at current levels), which we reckon is due to the weaker outlook on petroleum and LNG shipping rates as guided by management, and weak Chinese economic data that weighed on market sentiment. However, we believe fundamentals are intact and continue to favour MISC for its healthy balance sheet as we believe the group is on the lookout to acquire value accretive distressed assets, particularly in the oil and gas sector. 

Source: Kenanga Research - 10 May 2016