Amid the uncertain global market sentiment, investors may appreciate MISC’s defensiveness, underpinned by its stable dividend pay-out (yielding ~4%). Winning the Mero- 3 FPSO in Brazil would act as a re-rating catalyst. Furthermore, earnings outlook is also expected to improve, backed by recent contract wins. BUY with TP at RM8.90, based on 1.1x PBV on FY20E (implying PER of 22x). We believe recent share price weakness could provide a buying opportunity.

To recap, MISC has been bidding for the Petrobras’ Mero-3 FPSO contract in Brazil. Based on industry sources, competition includes Japan’s Modec and Netherlands-based SBM Offshore. Despite earlier reports suggesting Petrobras postponing bidding date to June 2020, latest reports are now confident that the March deadline stands. Note that the bidding date has already been pushed back once before, with prior submission date being Dec 2019.

From our back-of-envelope calculation, we estimate the contract would add incremental fair value of approximately RM0.90/share to our current TP (based on assumptions of USD2bn capex, 12% IRR). Currently, industry experts put SBM Offshore as the favourite to win, with the company having also previously won the Mero-2 contract, thus possibly giving them an operational and pricing advantage thus MISC is seen as a dark horse. Winning Mero-3 would mark as MISC’s maiden mega-sized FPSO project.

Outside of its FPSO bids, the company is also actively increasing exposure to term charters (as opposed to spot market), thereby improving future cash flows and earnings’ visibility. MISC is currently scheduled to have 7 shuttle tankers delivered throughout 2020, all of which have attached charter contracts of >5 years, and thus would help to drive earnings growth for FY20-21.

As for its upcoming 4QFY19 results (expected release on 18 Feb 2020), we are also expecting a stronger set of results, both on a YoY and QoQ basis, given the stronger spot charter rates for its petroleum tankers, especially during the winter months.

Source: Rakuten Research - 5 Feb 2020