MISC had accepted a letter of intent (LOI) from Petrobras for the Mero 3 FPSO, chartered for 22.5 years commencing 1HFY24. Contract value, although undisclosed, is guesstimated to be ~USD5.8b (~USD700k/day), with capex of ~USD2b. No surprise from this award, as we have well anticipated it, marking MISC’s maiden FPSO project in Brazil, as well as the group’s largest to date. Maintain OUTPERFORM, with TP of RM8.90.

LOI of Mero 3 FPSO. MISC had accepted a LOI from Petrobras for the provision, operation and maintenance services of the Mero 3 FPSO, located offshore Rio de Janeiro in the Libra block, Santos Basin, Brazil. The term of charter is for 22.5 years, and is expected to commence operation in 1HFY24.

Gathered details on the FPSO. As no other information regarding the FPSO was disclosed in the announcement, we believe the commercial terms are still pending finalisation. Nonetheless, we gathered that the day rate of the contract could be around ~USD700k, thus implying a total contract value of ~USD5.8b. Total capex for the project is understood to be around USD2b – much higher than other Brazilian FPSO projects, given its higher local content requirement. The FPSO will be named “Marechal Duque de Caxias” and will feature topside modules capable of processing 180k barrels of oil and 12m cubic metres per day of natural gas.

Maiden FPSO project in Brazil. The contract win came as no surprise to us, as we had highly anticipated the contract to be awarded to MISC, edging out competition SBM Offshore. Nonetheless, we are still positive on the award, being MISC’s first ever FPSO project in Brazil. This will also mark as the company’s largest FPSO project to date. Moving forward, with an established footing in Brazil, this could provide some costing advantages and operational expertise in improving the company’s future commercial bids in the country, potentially paving the way for more FPSO bids in the future.

Based on our IRR assumption of 11% and discounting rate of 6%, we arrived at a project NPV of ~USD975m (or ~RM0.90/share impact). From our estimations and assumptions, the contract would provide an average earnings contribution of ~RM400m/year, although finance lease accounting could mean that earnings recognition could be frontloaded towards the earlier years of the contract’s tenure. Assuming undertaking a full stake, the capex could see the company’s net gearing grow more than double to 0.4x, from 0.2x currently. As such, we do not discount the possibility of MISC seeking for equity partners in the coming future to help alleviate some of the capex burden.

Maintain OUTPERFORM and TP of RM8.90, pegged to 1.1x PBV. No changes to our FY20-21E numbers and TP, as we deem our ascribed premium valuation (+2SD from mean) to more than encompass the value of the Mero 3 FPSO contract.

Overall, we continue to like MISC as a defensive play among blue chip counters given its reliable dividends (fetching ~4% yields). The group is also among the least impacted within the oil and gas sector by the current down cycle, given its long-term contract business nature.

Risks to our call include: (i) weaker-than-forecasted charter rates, (ii) stronger-than-expected MYR/USD exchange rates, (iii) lower-than- expected number of operating vessels.

Source: Kenanga Research - 18 Aug 2020