MISC’s FY22 earnings exceeded expectations, thanks to the strong shipping freight rates, albeit dampened by cost escalation in its Mero-3 FPSO project. Overall, we like MISC for its cash flow resiliency, coupled with it being a beneficiary of strong shipping rates, though cost escalation may still persist in the near term. We raise our FY23F earnings by 39% and introduce FY24F numbers, lift our TP by 3% to RM7.50 (from RM7.30) and maintain our MARKET PERFORM call.

Results exceeded expectations. FY22 core net profit of RM2.4b (arrived after stripping off impairments and gains on disposal) beat our forecast and the consensus estimate by 23% and 29%, respectively. The variance against our forecast came largely from the higher spot freight rates which buoyed earnings of its petroleum and product shipping segment.

Stronger earnings helped by rise in freight rates. YoY, FY22 core profit jumped 26%, largely due to the stronger showing from the petroleum and product shipping segment amidst high freight rates. The results were also slightly helped by the better gas assets and solutions segment due to lower opex from lower dry-docking activities. However, these were partially offset by lower contributions from its offshore business as a result of increased construction cost in its Mero-3 FPSO project arising from the global supply-chain issues and lockdowns in China.

Briefing highlights. The key takeaways from its analyst briefing yesterday are as follows:

1. Petroleum tanker rates continued its uptrend. Petroleum shipping market rates have continued to strengthen amidst reshuffling of trade routes prompted by EU sanctions on Russia, as well as increasing Asia-bound crude oil imports and easing of Covid restrictions in China.

2. Concentrating on execution of FPSO projects on hand. The Mero-3 FPSO, which is currently undergoing conversion works at CIMC Raffles shipyard, suffered cost escalations due to the supply chain disruptions and lockdowns in parts of China. With the gradual reopening of China, we believe the construction progress will accelerate to meet the targeted mid-2024 delivery. The group is now focusing on delivering projects at hand, before selectively pursuing other opportunities in certain targeted markets.

Forecasts. We raise our FY23F earnings by 39% to account for the higher spot freight rates for its petroleum shipping division, while simultaneously introducing new FY24F numbers.

Maintain MARKET PERFORM, with a slightly higher SoP-based TP of RM7.50 (from RM7.30 previously), as we roll forward our valuation base year. Note that our valuations reflect a 5% premium to account for MISC’s 4-star ESG rating as appraised by us (see Page 5).

Overall, we like MISC for: (i) its long-term LNG contracts providing cash flow resiliency, and (ii) the potential to benefit from the recovery in petroleum tanker spot rates. However, over the short term, we believe the group could face some project cost escalations, especially in its Mero-3 FPSO.

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

Source: Kenanga Research - 16 Feb 2023