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Upgrade to BUY from Neutral, MYR7.79 TP, 13% upside. MISC’s 1H22 results are within our expectations, after factoring out one-off items such as the Mero 3 cost provision and the impairment on its LNG vessels. We believe the company has provided sufficient cost provisions on the Mero 3 project, and headline profit should normalise in 2H22 – with potentially more LNG contract wins ahead. As such, its recent share price weakness has led to attractive entry levels, backed by an attractive dividend yield of 5%.
1H22 core earnings of MYR834m (+24%YoY) are within our and Street projections,at 54% and 46% of full-year estimates. A second DPS of 7 sen was declared (2Q21: 7 sen), as expected.
Results review. MISC recorded core profit of MYR461m in 2Q22 (+34% YoY) after stripping off MYR310m impairment of LNG carriers, USD40m additional Mero 3 cost provision and a MYR6m gain on ship disposals. The stronger YoY performance was led a stronger performance from the petroleum division, which stemmed from higher mid-sized tanker rates and higher LNG profit. Cumulatively, 1H22 core earnings also improved by 24% YoY, on the back of a stronger heavy engineering division – led, in turn, by the reversal of cost provisions, dry-docking activities as well as LNG (+21%, higher earnings days and lower dry-docking activities). This was offset by the weaker offshore divisions.
Outlook. TheMero 3 project was 48%-completed as of 2Q22, with the delivery date being pushed by six months to mid-2024. Management guided that the Mero 3 project cost has risen by 9%, and the additional cost will be recognised accordingly, based on the percentage of completion. On the other hand, its term-to-spot ratio within the petroleum division increased to 72:28 from 65:35 in 1Q22. The near-term outlook of the petroleum tanker market should be positive, with continuing growth in global oil demand and supply. Following the delivery of the two dynamic positioning shuttle tankers (DPST) in 2Q22, there will be one more DPST to be handed over in 2H22, followed by two LNG carriers and one VLCC in 1H23. There are also two, two and then three LNG long-term contracts due in 2022, 2023 and 2024. Its current bid book is worth c.USD2-3bn – on which the company sees better opportunities in securing new gas related contracts.
We maintain our earnings estimates and SOP-based TP of MYR7.79. MISC’s balance sheet remains solid, with its net gearing firmly maintained at 0.3x as at 2Q22. We have a 0% ESG premium or discount applied, since its ESG score of 3 is on par with our country median. Downside risks to our call: Weaker-than-expected petroleum tanker rates, and unexpected contract cancellations of long-term contracts.
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....