Reiterate OUTPERFORM call and TP of RM8.90. With uncertain global market sentiment, investors may appreciate MISC’s defensiveness, underpinned by its stable dividend pay-out (yielding ~4%). Currently bidding for the Mero-3 FPSO in Brazil; winning this mega project would act as a re-rating catalyst. Furthermore, earnings outlook is also expected to improve, backed by recent contract wins.

Competing for Mero-3 FPSO. To recap, MISC has been bidding for the Petrobras’ Mero-3 FPSO contract in Brazil. Based on industry sources, competition includes Japan’s Modec and Netherlands-based SBM Offshore. Despite earlier reports suggesting Petrobras postponing bidding date to June 2020, from March 2020 currently, latest reports are now confident that the March deadline stands. Note that the bidding date has already been pushed back once before, with the prior submission date being Dec 2019, in efforts to encourage more bidders to participate. With the bidding date being in March, we believe it is likely to see the contract being awarded in 4QFY20.

Winning Mero-3 would be a catalyst. We believe that should MISC manage to win Mero-3, the contract award will definitely serve as a rerating catalyst. From our back-of-envelope calculation, we estimate the contract would add incremental fair value of approximately RM0.90/share to our current TP (based on assumptions of USD2b capex, 12% IRR). Currently, industry experts put SBM Offshore as the favourite to win, with the company having also previously won the Mero-2 contract, thus possibly giving them an operational and pricing advantage, and thus MISC is seen as a dark horse. Winning Mero-3 would mark as MISC’s maiden mega-sized FPSO project.

Stronger earnings expected still. Outside of its FPSO bids, the company is also actively increasing exposure to term charters (as opposed to spot market), thereby improving future cash flows and earnings’ visibility. MISC is currently scheduled to have 7 shuttle tankers delivered throughout 2020 (i.e. full-year earnings impact in 2021), all of which have attached charter contracts of >5 years, and thus would help to drive earnings growth for FY20-21. As for its upcoming 4QFY19 results (expected release on 18 Feb 2020), we are also expecting a stronger set of results, both on a YoY and QoQ basis, given the stronger spot charter rates for its petroleum tankers, especially during the winter months.

Reiterate OUTPERFORM given its defensiveness, with TP unchanged at RM8.90, based on 1.1x PBV on FY20E (implying PER of 22x). Although MISC was the best performing FBMKLCI composite stock in 2018, we believe recent share price weakness, especially given the backdrop of weak overall market sentiments of late, could provide a buying opportunity. At uncertain times like these, investors may appreciate MISC’s defensiveness, underpinned by its stable and consistent dividend pay-outs (yielding ~4%), which is relatively decent among blue-chip names, while also providing visible earnings growth.

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) continued and sustained slowdown in global economy.

Source: Kenanga Research - 5 Feb 2020