The counter claim of SSPC is a negative surprise to us as the basic counter claim is double the amount awarded via Arbitration Proceedings in February. As the arbitration hearing has been fixed in 1Q19 with the Arbitration Award expected to be issued around FY20, we made no changes to our current estimates but do not discount the possibility of provision. All in, we maintain MARKET PERFORM call on the stock with an unchanged target price of RM8.04/share.

Counterclaim from SSPC. Last Friday, MISC announced that SSPC has filed its Statement of Defence and Counterclaim (SDCC). In its SDCC, Sabah Shell Petroleum Company Limited (SSPC) has refuted its wholly-owned subsidiary, GKL’s claims and is counterclaiming against GKL for alleged defective work, alleged limited functionality of the Gumusut–Kakap Semi-Floating Production System (Semi-FPS), liquidated damages amounting USD583.0m (c.RM2.5b) and a refund of the full amount paid to GKL under the Adjudication Decision rendered in the Adjudication Proceedings as well as the costs and expenses of the Adjudication and Arbitration Proceedings.

Recall that GKL commenced the legal proceedings to seek resolution on contractual disputes covering claims for outstanding additional lease rates, payment for completed variation works and other associated costs under the lease agreement dated 9 November 2012 between GKL and SSPC for the construction and lease of the Gumusut-Kakap Semi-FPS. In February, GKL was awarded a total sum of c.USD255.0m as additional lease rates via the Adjudication Proceedings.

Negative surprise. This is a negative surprise to us as the counter claim is double the size of what was awarded in February this year. Should SSPC successfully get the counterclaim, the basic claim of USD583m will pressurise MISC’s cash in hand, which stood at RM6.0b as of 1Q17. However, the limitation of liability clause from the contract will limit its exposure to only USD200m.

No changes to our FY17-18E earnings. As the arbitration hearing has been fixed for 25th February 2019 to 16th March 2019 with the Arbitration Award expected to be issued around year 2020, we made no changes to our FY17-18E earnings. However, we do not discount the possibility of provision pending further material development of the Arbitration Proceedings will be made in due course.

Maintain MARKET PERFORM. MISC is looking for market recovery within the petroleum shipping space at earliest 2H17 backed by sustainable demand and moderation of fleet growth. Meanwhile, LNG charter rates are still under pressure due to overcapacity, which is likely to last until 2018 and charterers are seeking shorter contract term of 7-10 years instead of 15-20 years. All in, we maintain our TP of RM8.04 pegged to unchanged FY18 PBV 0.9x, which is -0.5SD to the 5-year mean. Having said that, MISC’s balance sheet remains healthy with net gearing of 0.2x, allowing it to seek opportunistic brown field replacement projects and shallow-water assets requirement in the region.

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

Source: Kenanga Research - 05 Jun 2017