MISC announced a contract for two new LNG vessels, valued at USD201.6m for a firm charter period of 18 years, commencing 2021. Overall, despite the relatively inconsequential impact towards the group’s earnings and balance sheet, we believe this could be indicative of the group’s strategy of increasing exposure to long-term charters. Maintain OUTPERFORM with TP of RM8.80, given decent dividend yields as an FBMKLCI constituent.

Two new LNG vessels. MISC announced that it has signed an agreement with Mitsubishi Corporation and Nippon Yusen Kabushiki Kaisha to co-own two new-build LNG vessels. Each LNG vessel will serve Diamond Gas International Pte. Ltd.’s LNG carrier requirements worldwide, particularly LNG volumes from U.S. and Canada, on a time charter contract for a firm period of 18 years. MISC’s interest in the total contract value is estimated at USD201.6m. The LNG vessels, currently being built by Hyundai Samho Heavy Industries, are expected to be delivered in 2021 and the time charter contract will commence upon delivery.

Impact of the contract. Based on the contract value of USD201.6m and 18-year charter period, implied rates for the charter would be at around ~USD30k/day. We expect the contract to be able to fetch PBT margins of roughly 50%, thereby contributing to approximately ~RM22m per year from 2021 onwards – somewhat inconsequential to MISC’s current earnings base (~1% of FY19/20E earnings). Likewise, we guesstimate MISC’s capex portion to be roughly ~USD50m, which would have minimal impact to the company’s balance sheet as well, with net-gearing of 0.2x and net-debt of RM7.4b as at end-2Q19. Upon commencement of the charters, we believe this would bring MISC’s LNG fleet to 31 vessels, from currently 29.

Overall, despite the relatively inconsequential impact from the contract towards the group’s financials, we believe this could be indicative of the group’s continued efforts in increasing exposure to longer-term charters, thereby limiting the impact that spot tanker charter rates have on the group.

Maintain OUTPERFORM, with unchanged TP of RM8.80, pegged to 1.1x FY20E PBV at +2SD from its 5-year mean but in-line with the mean of global peers. No changes made to FY19-20E earnings given that the charter only commences in 2021.

All things aside, we continue to 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 - 25 Sept 2019