MISC through a consortium with NYJ, K-Line and CLNG, has been awarded a long-term charter contract for seven LNG carriers, starting 2025. Overall, we are positive on the contract win being a continued replenishment to its LNG fleet, although immediate earnings impact may be smallish. No changes to our MP call albeit with a slightly lowered TP of RM7.55.

LNG charter contract award. MISC announced that through a consortium with Nippon Yusen Kabushiki Kaisha (NYK), Kawasaki Kisen Kaisha (K-Line) and China LNG Shipping (CLNG), the company has been awarded a long-term time charter contract by QatarEnergy for seven 174,000 m3 newbuild liquified natural gas (LNG) carriers to be built by Hyundai Heavy Industries. Each consortium member will have an equal equity interest of 25%, with the long-term charters starting from 2025 onwards. No further details or information were disclosed. Below are some of our views of the contract win:

1. Key assumptions. While no further details were disclosed (e.g. contract value, contract duration etc), based on our estimated assumptions of: (i) charter period of ~15 years, (ii) capex per vessel of ~USD230m – broadly in-line with current newbuild market rates, and (iii) IRR of ~9%, our back-of-envelope calculations suggest an average earnings per year impact of roughly RM31m (or ~2% of our FY22-23E) taking into account MISC’s 25% stake. Impact towards the group’s balance sheet should also be minimal (current net-gearing at ~0.3x).

2. Further strengthens MISC’s LNG segment. Being the main bread and butter for MISC, the LNG segment continues to be the group’s biggest earnings and cash flow contributor (as reference, the segment contributed ~88% of the group’s 1QFY22 core earnings). This contract win will further strengthen its current LNG fleet of ~30 vessels.

3. More contract wins expected. With >10 long-term LNG contracts expected to expire in the coming 3-4 years, we expect the group to be more aggressive in its bidding activities in order to make up for the anticipated short-fall of cash flows. The market rates for 3-year LNG carrier charters are currently near a multi-year high, and hence, upcoming contracts secured would yield much better returns should some of these older vessels be repurposed. Meanwhile, we understand that the group is also aggressively bidding for an FPSO contract for TotalEnergies’ Cameia project in Angola, in partnership with Saipem.

Overall, we are mildly positive on the contract win, seeing it as a continued replenishment of the group’s LNG fleet. We made no changes to our FY22-23E numbers, given the contract’s 2025 commencement date and its smallish immediate earnings impact.

Upcoming quarter likely to see provisions. Looking ahead, we expect the upcoming 2QFY22 reported earnings to be weaker, as we anticipate the group to recognise impairments and provisions following the continued delays and cost escalations for its Mero-3 FPSO, currently undergoing conversion and fabrication works at CIMC Raffles shipyard in China.

Maintain MARKET PERFORM, albeit with a slightly lower TP of RM7.55 (from RM7.70 previously), as we switched our valuation methodology to sum-of-parts (from 1.0x PBV previously). Note that our valuations have also taken into account our in-house ESG rating of 4-star.

Risks to our call: (i) poorer-than-expected fleet utilisation, (ii) project execution risks, (iii) fluctuation in spot charter rates.

Source: Kenanga Research - 11 Aug 2022