MISC was awarded long-term charter contracts for three newbuild Suezmax DP2 Shuttle Tankers from Petrobras worth USD525.6m, commencing in 2022. Overall, we are positive, given the positive impact on earnings and cash flows upon charter commencement, and also highlighting fruition of management’s continued efforts to increasing future earnings and cash flow certainty. Maintain OP with TP of RM8.90.

Secures shuttle tankers contract. MISC announced that it has been awarded long-term contracts to own and operate three newbuild Suezmax DP2 Shuttle Tankers from Petrobras for operations in Brazilian and international waters. The estimated contract value is USD525.6m (or ~RM2.2b) and the charter is expected to commence in 2022. These new vessels will be in addition to the six (four currently under construction) specialist DP2 Suezmax size Shuttle Tankers on time charter to Petrobras for operation in the Brazilian Basin.

Takeaway from the contract win. Given that there was no contract duration disclosed in the announcement, we were not able to accurately estimate the charter rates implied as well as yearly earnings contribution.

However, looking at the sizable contract values, we are guesstimating that the charter periods could be ~10 years (as a comparison, MISC had also earlier in Dec 2019 secured a charter contract from the Shell Group for three Suezmax class shuttle tankers in Brazil for a value of USD245m – less than half the value of this latest contract). Using the assumption of a 10-year charter period would imply daily charter rates of ~USD48k/day – which we acknowledge could be higher than usual market rates (as a comparison, current 3-year time charter rates for Suezmax tankers are now at ~USD29k/day). We believe this could be due to the vessels being specialist tankers (i.e. built to spec), coupled with other value-added additions embedded into the contract value. Assuming margins of 40% would imply earnings impact of RM84m/year (or ~5% from our FY20E assumptions). However, note that earnings impact will only kick-in after 2022 upon charter commencement.

Positive on the charter contract. On the bigger picture, the contract award is a reflection of management’s current efforts to increasing term charter exposure, thereby increasing certainty of future earnings and cash flow, while also minimising earnings impact from the spot market, with its current tanker fleet portfolio of 60% term and 40% spot.

Reiterate OUTPERFORM given its defensiveness, with TP unchanged at RM8.90, based on 1.1x PBV on FY20E EPS (implying PER of 22x). Post-contract award, we made no changes to our FY19- 20E numbers, given the charter commencement only in 2022.

Although MISC was the best performing FBMKLCI composite stock in 2019, we believe its 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 - 6 Feb 2020