MISC organised an analyst engagement session yesterday with its president and group CEO Mr. Yee Yang Chien. The session mainly focused on several big-picture and longer- term topics, as well as a heavy emphasis on ESG and energy transition. Overall, we returned from the session feeling positive on the group’s increasing commitments towards ESG, but with our outlook on the company mostly unchanged. Maintain OP with TP of RM8.10.

Commitments towards ESG. A large portion of the session yesterday was focused on the group’s stance on ESG and energy transition. All- in-all, the group seems prepared to meet IMO’s decarbonisation strategies, and stands behind its recent investments into dual-fuel LNG vessels as a more environmental-friendly option. Moving forward, the group will also continue is existing strategy of retiring old fleets that are deemed too uneconomical to be retrofitted, with upcoming newer fleets to be well equipped to meet stricter emission targets. While the group still does not have an internal carbon emission target, management has guided that it is something that the group is working on. Management is also seeking to further increase its ESG disclosure by end-FY21. As for the long-term vision (i.e. >30 years ahead) of the group amidst the current energy transition trend, management sees MISC to remain as a maritime-based shipping company first and foremost. As such, it is unlikely for the company to transition into any on-land investments or ventures (e.g. electric vehicles). Instead, MISC will be open to future sources of propulsion (e.g. hydrogen fuel) once the technology is ready in the far future to replace the existing combustion propulsions.

Not looking for huge investments in the near future. After securing the Mero 3 FPSO project in 2020, the group is currently looking to preserve its capital and is not expected to pursue any large projects for the next 1-2 years, even despite a rise in global FPSO tender opportunities. This would also mean that the group will not be participating in bids for Total’s Suriname oil project, dismissing news articles from Upstream. However, one project the group is looking to participate is Limbayong FPSO, offshore Sarawak. Capex size is expected to be ~USD500m, with project award date likely to be in 3QFY21. Over the longer-term, MISC says it targets to land another major FPSO project in next five years, coupled with another 2-3 small/mid-sized ones.

Spot tanker rates to remain challenging. Management has also stated that it expects petroleum tanker charter rates to remain weak, and is not expected to recover to 2020 levels anytime soon. This would translate to continued weak performance for its petroleum shipping segment, of which 33% is exposed to the spot market (as at 1QFY21).

Maintain OUTPERFORM, with unchanged TP of RM8.10, pegged to 1.1x PBV at +2SD above its mean valuations. Overall, we came away from the session with our views largely unchanged. We still like the name as a blue-chip dividend play (~5% yields), coupled with its ESG commitments.

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 - 2 Jun 2021