MISC organised a Mero 3 FPSO Engagement Session yesterday, after being awarded the LOI for the project in Aug 2020. We returned from the session feeling mostly neutral, with our assumptions and understanding of the project remaining mostly intact as most of the commercial terms are still undisclosed/yet to be finalised. Nonetheless, management expressed high confidence in the successful delivery and execution of the project. Maintain OP with TP of RM8.90.

Long time in the making. Since 2017, MISC has been expanding its footprint in Brazil, hiring deep water experts and more than doubling its offshore business unit with the aim of landing a mega-sized FPSO project in Brazil. It subsequently ran for trial bids for Brazilian FPSO projects, having reportedly been disqualified for the Buzios 5 FPSO on technical grounds, and also failing its bid for the Mero-2 FPSO. In 1QFY20, the group submitted its bid for the Mero 3 project, before finally being awarded the letter of intent (LOI) on 14 Aug 2020, edging out competitor SBM Offshore (refer to our report dated 18 Aug 2020 for more information/analysis).

Management confident in project delivery and execution. As such, given the multiple years of building blocks put in place prior to the contract win, management seems confident in its capabilities of successful project delivery and execution of the Mero 3 FPSO (to be named as “Marechal Duque de Caxias”). This is despite: (i) the project being MISC’s maiden FPSO project in Brazil, and (ii) high local content requirement of 40%. The FPSO will be converted from an existing MISC VLCC “Bunga Kasturi Dua”, with majority of the design and engineering works to be outsourced (Norway’s Aker solutions reportedly was awarded the front-end engineering and design for the topside of the FPSO). While originally intending the conversion works to be executed in a Singaporean yard during the project’s conceptualisation phase, it is understood that the conversion works will now most likely be awarded to a Chinese yard to further improve commercial returns from the project. Tenders are still in process.

Possible equity partners in the future. Management is also open to possibly disposing up to 50% equity stake on the project post- completion of construction of the FPSO. Currently, no firm agreements for equity partners are in place yet. The company is adamant on completing delivery of the project on its own, seeing this as an opportunity to demonstrate its technical capabilities.

No other commercial terms disclosed. As no other significant commercial terms were guided or disclosed during the engagement session, we deem our existing assumptions of 11% IRR and ~USD700k day rate to be intact. Based on these assumptions, we arrived to a project NPV of ~USD975m (or ~RM0.90/share) assuming full equity stake. No changes to our FY20-21E numbers.

Maintain OUTPERFORM and TP of RM8.90, pegged to 1.1x PBV. We deem our ascribed premium valuation (+2SD from mean) to have more than encompassed 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 - 14 Oct 2020