• Keep NEUTRAL and MYR7.79 TP, 9% upside, 5% yield. We are positive on the seven LNG carrier charter contracts secured by MISC’s 4-party consortium with other established Asian shipping companies, which should increase its recurring income base. At 7.5% WACC, USD220m per vessel, and 9% IRR, we value these contracts at MYR0.10/share and expect it to contribute c.MYR35-40m net profit (2% of our FY23F earnings) from 2025.

• LNG carrier contract wins. MISC, through a consortium (25% equity stake each) with Nippon Yusen Kabushiki Kaisha (NYK), Kawasaki Kisen Kaisha Ltd (K-Line), and China LNG Shipping (Holdings) Ltd (CLNG), has been awarded long-term time charter contracts by QatarEnergy for seven newbuild LNG carriers. The vessels, which will be built by Hyundai Heavy Industries, are expected to commence operations by 2025.

• Expanding its LNG fleet size. We are positive on the contract wins, as it will expand MISC’s current LNG fleet size of 30 (effectively by 1.75 vessels) and provide recurring income in the long term, although the actual number of seven vessels is lower than the 12 reported in the media. The consortium partners are established Asian shipping companies. The seven vessels will have a capacity of 174,000 cbm each, similar to the two LNG carriers chartered for Exxon Mobil Corp, but larger than its existing Seri C class vessels (150,200 cbm). The vessels will be equipped with eco-efficient technologies such as XDF 2.1 engines with Intelligent Control by Exhaust Recycling (iCER) and Air Lubrication systems, which will reduce greenhouse gas (GHG) emissions.

• While there is limited disclosure on the contract details, we estimate the daily charter rate to be in the range of USD80,000-90,000/day, which is lower than the average 3-year time charter of >USD100,000/day in July. Such rates are also higher than Exxon Mobil’s implied charter rate of c.USD65,000/day, as the cost of building a new vessel has escalated by c.40% to as high as USD236m in July. As we are guided that the firm tenure is kept below 20 years, it is likely to be in the range of 10-15 years.

• NEUTRAL. Assuming each vessel costs USD220m, with 15-year firm tenure and USD90,000/day DCR, the IRR would be c.9%. At 7.5% WACC and 25% equity stake, we value the contracts at MYR0.10/share and should contribute c.MYR35-40m net profit (2% of FY23F earnings). As MISC’s balance sheet is solid, with net gearing at 0.28x in 1Q22, we believe it is capable of funding the equity portion of net capex, estimated at USD120m, assuming 70% debt financing. Maintain earnings estimates as we have factored in similar contract wins. Our SOP TP includes a 0% ESG premium/discount, based on its 3.0 ESG score. Risks: Weaker-than- expected petroleum tanker rates and contract cancellations of long-term contracts. The opposite represents upside risks.

Source: RHB Research - 11 Aug 2022