• Maintain NEUTRAL and MYR7.79 TP, 10% upside. MISC is committed to its sustainability and net zero pledges, which are long term positives in terms of the ESG perspective. However, the potential cost/investment amount is unclear given the evolving landscape and advancements in technology. In the near term, we are cautious over the delays and cost overruns on the Mero 3 project, with more provisions to be recognised in 2Q22 amidst a potential impairment on expiring LNG vessels.

• Sustainability agenda and net zero commitment update. As part of the stakeholder engagement exercise, MISC hosted a sustainability agenda and net zero commitment conference call yesterday. MISC has set an interim target of reducing 50% greenhouse gas (GHG) intensity by 2030 and achieve net zero by 2050. MISC’s total GHG emission (scope 1 and 2) was 4.19m mt CO2 equivalent, of which 98% is attributable to its shipping business. MISC has begun to include scope 3 in the GHG accounting. Some of the notable climate strategies include to progressively convert its current fleet and ensure all newly builds are zero-carbon emission vessels from 2031 or sooner, retrofit carbon removal technologies on recent (vessels with remaining lifespan of 15 years) low methane slip, LNG dual- fuel vessels, and ramp up renewable energy usage on offshore assets and land operations. With that, the group is targeting to reduce its total emission (scope 1-3) by 88% as compared to a business as usual scenario, while the remaining emissions are expected to be offset via nature-based removal projects starting from 2031 or earlier.

• Unclear of the potential cost/investment amount. Although there is a collaborative development effort with its strategic partners to produce the world's first ammonia-fuelled ship by 2025, management would also consider other alternatives such as methanol-fuelled vessels. Currently, MISC is still unable to quantify the potential cost/investment needed to achieve these targets as many of the technologies have yet to be commercialised. In order to align its decarbonisation corporate agenda, climate-related initiatives, and annual GHG emission intensity have been included as part of its balance scorecard. Internal carbon pricing is also being adopted in new asset investment decisions.

• Maintain NEUTRAL. With no changes to estimates, our SOP-derived TP is kept at MYR7.79 with a 0% ESG premium/discount applied, as its ESG score of 3.0 is on par with our country median. MISC is likely to incur Mero 3 cost provision and LNG vessel impairment in 2Q22. Results will be announced on 18 August. Operating cash flow is still guided to improve this year, backed by the upcoming new asset additions despite having several LNG long-term contracts due in 2022-2024. This would be sufficient to anchor its 33 sen DPS, fetching a decent yield of 4.6%. MISC’s balance sheet remains solid, with net gearing well kept at 0.28x as at 1Q22.

• Risks: Weaker-than-expected petroleum tanker rates and contract cancellations of long-term contracts. The opposites represent upside risks.

Source: RHB Research - 27 Jul 2022