MISC through a consortium with NYJ, K-Line and CLNG, has been awarded a long-term charter contract for five 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. Maintain our MP call and TP of RM7.05.

LNG charter contract award from QatarEnergy. MISC announced that, through a consortium with Nippon Yusen Kabushiki Kaisha (NYK), Kawasaki Kisen Kaisha (K-Line) and China LNG Shipping (CLNG), it has been awarded long-term time charter parties by QatarEnergy for five 174,000 m3 newbuild liquefied natural gas (LNG) carriers to be built by Hudong-Zhonghua Shipbuilding, with the long-term charters starting from 2025 onwards. Each consortium member will have equal interest of 25% in each awarded carrier. No further details or information were disclosed.

Below are some of our key takeaways from the contract win:

1. A follow-up from a previous contract. We believe this latest contract win is a follow-up from a previous contract award in August 2022, where the same consortium was also awarded seven similarly sized LNG carriers from the same client. This brings a total of twelve LNG carriers to be delivered to QatarEnergy by the consortium.

2. 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 ~USD250m – 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 RM24m. Note that our assumptions imply a daily charter rate of ~USD120k, which we believe is also broadly within market rates. Impact towards the group’s balance sheet should also be minimal (current net-gearing of 0.3x).

3. Further strengthens MISC’s LNG segment. The contract win will further strengthen MISC’s LNG segment as its most significant earnings and cash flow contributor (as reference, the segment contributed 87% of the group’s 1HFY22 core earnings), expanding on the group’s current LNG fleet of ~30 vessels. This also marks the group’s third contract win of the year, bringing YTD effective new LNG fleet to 5 vessels.

4. More LNG contracts expected. With over 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, especially considering that current market rates for long-term LNG charters are near multi-year highs.

Maintain MARKET PERFORM, with SoP-TP of RM 7.05. With the charters commencing only in 2025 onwards, our FY22F/FY23F earnings remains unchanged. Likewise, there is no change to our SoP-TP of RM7.05, as we deem the contract win to be well within our assumptions. Note that our valuations have also taken into account our in-house 4-star ESG rating. Overall, we like MISC for: (i) its long-term LNG contracts providing cash flow resiliency, and (ii) being a beneficiary of the recovery in petroleum tanker spot rates. However, over the short term, we believe the group could be faced with some project cost escalations, especially for its Mero-3 FPSO project.

Source: Kenanga Research - 4 Nov 2022