• MISC has accepted a LOI from Petrobras for the provision of floating storage and offloading facility of Mero 3 FPSO 
• Estimated contract size of ~USD5.75b for 22.5 years
• Mero 3 FPSO marks MISC’s largest contract win to-date
• Detailed terms and conditions are still pending finalisation
• FY20-21F earnings estimates remains unchanged
• Maintain Trading Buy with an unchanged TP of RM8.20 per share

Mero 3 FPSO is set to sail-away in 2024. MISC announced that it has accepted a Letter of Intent (LOI) from Petróleo Brasileiro S.A. (Petrobras) for: (i) the provision of a floating production storage and offloading facility (“Mero 3 FPSO”) as well as; (ii) the operation and maintenance services. The project is located offshore of Rio de Janeiro in the Libra block, Santos Basin, Brazil. The Mero 3 FPSO is expected to commence operation in the first half of 2024. The term of charter is 22.5 years (est. 2024 to 2046).

Contract details are scant for now. As information disclosed on the project were limited, we believe the final terms are still pending and under review. However, on the operational side, Mero 3 FPSO, will be the third unit to be installed in the Mero field with processing capacity of 180k barrels of oil and 12 million cbm of gas per day. The project calls for the drilling of 15 development wells, including eight oil producers and seven water and gas injectors, which will be linked to the FPSO through a rigid riser-based subsea structure yet to be contracted.

Mero 3 FPSO marks MISC’s largest contract win. The contract win does not come as a surprise to us as MISC was one of the frontrunners to clinch the contract. We gathered that the day rate of the rate can be potentially be around USD700k (est.). Size wise, this day rate implies a total contract value to be around USD5.75b, marking it MISC’s largest FPSO contract to-date. We understand that the estimated project CAPEX will be circa USD2.0b and part of Petrobras’ requirement is for the project to have 40% local content.

Mero 3 FPSO to contribute an estimated RM0.28 per share. Based on our estimate, with a discount rate of 6%, we arrived at project NPV of RM1.2b (circa ~RM0.28 per share). Our key estimates include day contract rate at USD700k, CAPEX at USD2b, residual value 20% of Total CAPEX with contract tenure at 22.5 years. Our preliminary analysis indicates that the Mero 3 yearly contribution to the bottom line will amount to average ~RM100m per year starting 2024, although there is a need to factor finance lease accounting on the project. To note, for finance lease, profit recognition is front loaded to the front of the project and progressively lower as project moves towards completion.

FY20-21F earnings estimate maintained. As Mero 3 FPSO will only be operational in the first half of CY24, we make no changes to our FY20-21F earnings estimates at this juncture. While we understand there will be preliminary contribution from the FPSO from FY20 onwards however, we deem it to be minimal at this juncture.

Maintain BUY with an unchanged TP of RM8.20. All factors considered and bearing in mind the current operating environment, we are maintaining our Trading BUY call on MISC at this juncture. Our TP is derived by pegging our FY21 book value per share to a 1.00x price-to-book value which is its five-year average at RM8.20 per share. We continue to like MISC due to its resilience as it remains insulated through its time charter rate contracts to the current volatile operating environment. Furthermore, we remain confident on its ability to secure further contract wins in the future. The downside risks to MISC are: (i) further downward movement of tanker rates and; (ii) lack of demand for floating storage.

Source: MIDF Research - 19 Aug 2020