MISC’s wholly-owned subsidiary, MISC Offshore Floating Terminals Limited (MOFT) has been awarded a contract for the lease and operations of a FSO for the FSO Benchamas 2 Project in the Gulf of Thailand valued at USD230m. We are neutral to mildly positive on the contract as the impact to earnings is minimal (<3% p.a.) post commencement in 2Q18. No changes to FY16-17E numbers. Maintain OUTPERFORM and TP of RM8.19.

Bagging an FSO contract in Thailand for USD230m. MISC’s whollyowned subsidiary, MISC Offshore Floating Terminals Limited (MOFT), has been awarded a contract for the lease and operations of a Floating, Storage and Offloading Vessel (FSO) for the FSO Benchamas 2 Project by Chevron Offshore (Thailand) Limited (COTL) in the Gulf of Thailand, valued at USD230m. The contract involves engineering, procurement, construction, installation, commissioning, lease and operations of the FSO Benchamas 2 Project and will be for a duration of 10 years with an option to extend for up to 5 extensions of one year each.

Neutral to mildly positive on the deal. We are neutral to mildly positive on this contract as the company has been able to secure a 10-year contract which should bode well for the group’s earnings in the long run, but the size of the contract is small and would only make up <3% of MISC’s top line per annum once the project commences in 2Q18. We are not surprised with the deal as it is within MISC’s strategy as the Group had previously highlighted that it planned to increase exposure to brownfield projects given the uncertainty in greenfield projects due to low oil prices currently. Going forward, we believe MISC will continue to remain competitive in securing more brownfield contracts as there may still be selective opportunities in the market.

We make no changes to FY16-17E numbers. We make no changes to FY16-17E earnings of RM2.5-2.7b as the FSO Benchamas 2 Project is expected to commence operations by 2Q18, while the impact to FY18 earnings is expected to be minimal (<3%).

Maintain OUTPERFORM and TP of RM8.19. We maintain our TP based on FY17E BVPS to RM8.68 and applied PBV multiple of 0.94x which is close to -0.5SD below the 5-year mean as low charter rates and oversupply in the sector continue to weigh down on sentiment, and we do not discount the possibility of impairments going forward. That being said, MISC still continues to warrant a convincing OUTPERFORM call with total returns of 11.4% at current levels, while we continue to like the stock for its healthy balance sheet, allowing it to acquire value accretive distressed brownfield assets should such opportunities arise in the market.

Risks to our call: lower-than-expected charter rates and worse-than expected slowdown of the global economy.

Source: Kenanga Research - 24 Aug 2016