We upgrade MISC to OP, with a TP of RM8.80, backed by its stable dividend yield of ~4% - one of the better ones among FBMKLCI constituents, providing defensiveness and limiting downside risks over the longer-term. The company is increasing efforts in tapping into the global FPSO market, while also slowly minimising exposure in the spot tanker market. The low FY18A earnings base could be a platform for earnings rebound potential for the next 1-2 years.

Tapping into the growth of the FPSO market. MISC has increased its efforts in tapping into the global FPSO market, identifying it as a key growth market for the group moving forward. We gathered that the company is preparing to submit a bid for a mega FPSO project in Brazil by the end of the year, with a capex of ~USD2b. Nonetheless, we believe the company could be open to equity-stake partnership should it win the project. Meanwhile, we also gathered the company had also submitted bids in partnership with YINSON for the Limbayong FPSO project by Petronas, with a guesstimate capex of ~USD700m. Overall, despite the relatively limited experience MISC has in the large-size FPSO market, we believe any successful project win from this space would be a huge positive for the company.

Long-term strategy of limiting exposures in the spot market. Moving forward over the longer-term, we believe the company is strategically limiting its fleet size for tanker vessels while also taking concerted efforts to shift its portfolio more towards term charters, thereby limiting exposure to the fluctuations of the spot market. Currently, MISC’s portfolio of petroleum shipping tankers (fleet of 78 vessels) stand at 65% term charters, and 35% spot charters. MISC has scheduled 7 shuttle tankers for delivery in the coming months, which we believe these would serve longer-term time charters (e.g. 7-15 years), reflecting the company’s on-going strategy of pivoting towards term rather than spot charters.

Low-base sets-up earnings rebound potential. As for the shorter term, we believe the low earnings base seen in FY18A could help set the scene for earnings rebound over the next 1-2 years. Spot tanker rates during the recent winter were noticeably much stronger after some rebalancing following high scrapping activities in 2018. Meanwhile, its subsidiary MHB could also potentially see a turnaround, lifted by increased dry-docking activities given the implementation of IMO2020, with the company also having recently secured the EPCIC contract for the Kasawari project, boosting its order-book to a multi-year high of ~RM3b.

Upgrade to OUTPERFORM (from MARKET PERFORM previously). Given the improved outlook, we raised our TP to RM8.80 (from RM7.60 previously), pegged to 1.1x FY20E PBV at +2SD from its 5-year mean (from 0.95x PBV at mean valuations, previously). All things aside, we like MISC given its stable dividend fetching ~4% yield, which is one of the better ones among FBMKLCI constituent stocks, thus providing some defence for the stock, while also helping to limit the share’s downside risks over the longer-term. Risks to our call include: (i) weaker-than-forecasted charter rates, (ii) stronger-than-expected Ringgit, (iii) lower-than-expected number of operating vessels, and (iv) slowdown in global economy.

Source: Kenanga Research - 23 Sept 2019