KEY INVESTMENT HIGHLIGHTS

• Contract awarded by a Shell Group entity worth USD245.0m commencing in FY22 to operate and own three Suezmax DPSTs

• Expected additional contribution to PBT of RM14.6m annually assuming a tenure of seven years and conservative PBT margin of 10%

• Impact from the cost for the three newbuild Suezmax DPSTs is minimal as net gearing estimated to increase slightly from 0.19x to 0.21x

• Earnings estimates for FY19,FY20 and FY21 unchanged

• Maintain NEUTRAL with an unchanged TP of RM8.35 per share

Contract award by Shell Group entity. MISC Berhad (MISC) in collaboration with Avenir LNG Limited (Avenir) has been awarded with three long-term Time Charter Party by Brazil Shipping I Limited (BSIL) (a Shell Group entity) to own and operate newbuild Suezmax Class Dynamic Positioning Shuttle Tankers (DPST) in international and Brazilian waters. In fact, this is the first contract award for the petroleum tanker segment in FY19. Prior to this, MISC was only awarded with contracts for its LNG segment totalling RM3.92b in FY19.

Estimated financial impact to MISC. The estimated contract value awarded by BSIL is USD245.0m (approximately RM1.02b) and is expected to commence in FY22. The usual tenure for a long term time chart contract for Suezmax class vessels would be around five to seven years. Assuming a period of seven years, we estimate that the revenue attributable to MISC from the said contract is circa RM145.9m per year. Assuming a conservative PBT margin of 10% based on historical trends when the petroleum tanker segment was profitable, this translates to an additional annual PBT of approximately RM14.6m per annum. The expected contribution from this contract is below 1.0% of the PBT estimated for FY22 assuming an annual growth in earnings of 5.0%.

Potential cost of new build Suezmax DPST. Based on our channel checks and our independent research, the cost for a newbuild Suezmax DPST is around 25%-30% higher than a normal vessel which currently costs around USD70m (approximately RM291.8m). With three vessels costing approximately RM875.4m, we estimated that MISC’s net gearing of 0.19x as of 30 September 2019 will only increase to 0.21x.

Our view. Although this latest contract award has a rather small value and is the only award for the petroleum tanker segment so far in 2019, we expect more contracts especially for the offshore segment to be dished out from FY20 onwards as guided by the management.

Earnings estimates. No changes made to our earnings estimates for FY19, FY20 and FY21 as the commencement of the contract is beyond our forecast horizon.

Target price. We are maintaining our target price at RM8.35 per share. Our TP is derived by pegging our FY20 book value per share to a 1.05x price-to-book value, which is +1.5 standard deviation above its five-year average, reflecting slew of contract awards for the LNG segment as of late in addition to the large job bids which MISC has entered into.

Source: MIDF Research - 9 Dec 2019