MISC has secured a 15-year firm period charter contract for six new Very Large Ethane Carrier vessels, with expected commencement in 4QFY20. The new vessels will be purchased for USD726m. We guesstimate the charter contracts should fetch IRRs of ~10%, contributing to roughly ~RM300/year in combined earnings. Maintain OUTPERFORM, with TP of RM8.90, being a defensive dividend play (~4% yield) especially among blue chip counters.

Addition of six vessels. MISC had entered into an agreement with Zhejiang Satellite Petrochemical Co Ltd for the time charter of six Very Large Ethane Carrier vessels for operation in international waters for a firm period of 15 years, with expected commencement in 4QFY20. The vessels will be purchased for USD726m, and will be constructed in shipyards in Korea by Samsung Heavy Industries and Hyundai Heavy Industries (3 vessels each). These newbuild vessels will have a capacity of 98,000 cubic meters.

Positive on the new charters. These new vessels will be in addition to MISC’s existing LNG fleet of 31 vessels, bringing its LNG fleet to a total of 37 vessels by end-FY20. This is excluding another 4 more vessels addition scheduled for delivery up until 1HFY23. We reckon these new vessel charters would fetch IRRs of ~10%. Based on our guesstimates, we believe the charter contracts would be able to contribute combined earnings of roughly ~RM300m/year (assuming 4% finance costs and exchange rate of RM4.30/USD), with an implied charter rate of roughly ~USD64k per day. The acquisitions are also expected to slightly increase the group’s net-gearing to 0.3x (from 0.2x currently). Overall, we feel positive on the new wins, seeing them as undoubtedly earnings accretive. These long-term charters will further strengthen MISC’s LNG segment, which currently is its largest earnings contributor, as well as minimising the group’s exposure to spot charter rates – in line with management’s overall strategy of increasing cash flow visibility of the group moving forward.

Maintain OUTPERFORM, with a slightly increased TP of RM8.90 (from RM8.85 previously), pegged to 1.1x PBV, which is at +2SD from its mean. We raised FY21E CNP by 12% to account for the new vessel charters. Overall, we still like MISC as a defensive dividend play (~4% yield), especially among blue chip counters. However, investors should be wary of possible upcoming earnings weakness (especially in 2HFY20) as a result of weaker spot charter rates post-April 2020. Nonetheless, any further dips could represent an entry opportunity for yield seeking investors, with its consistent dividends providing a resilient support to share prices.

Risks to our call include: (i) weaker-than-expected spot rates, (ii) stronger-than-expected Ringgit, and (iii) lower-than-expected number of operating vessels

Source: Kenanga Research - 16 Jul 2020