• Keep BUY and MYR7.79 TP, 15% upside with c.5% FY22F yield. We are positive on MISC’s two LNG carrier charter contracts, which should enlarge its recurring income base – although the estimated high single-digit equity IRR, in our view, is rather unexciting. We expect these contracts to contribute c.MYR35-40m in net profit (2% of our FY23F earnings) from 2026 onwards.

• Two LNG carrier contract wins. MISC has been awarded long-term time charter contracts by Exxon Mobil for two newbuild LNG carriers. The vessels will be chartered by SeaRiver Maritime, a wholly owned subsidiary of Exxon Mobil, for a firm period of 10 years. The charters are expected to commence in 2026.

• Expanding its LNG fleet size. We are positive on the contract wins, as it will expand MISC’s current LNG fleet size of 30 vessels, and boost recurring income in the long term. Note that MISC has secured two 15-year time charter contracts from Exxon Mobil, fetching an estimated combined contract value of USD711m, back in 2019. These vessels are currently under construction in South Korea, and are slated for delivery in 1Q23. While there is limited disclosure on the contract details, we estimate the daily charter rate to range USD80,000-90,000/day, which is lower than the average 3-year time charter of USD111,750/day in August. 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 had escalated by >30% to as high as USD240m in August.

• Unexciting equity IRR. Assuming each vessel costs USD235m, with 10- year firm tenures, 70% debt financing and a daily charter rate of USD90,000, the equity IRR would be at a high single digit. These vessels are expected to contribute c.MYR35-40m in net profit (2% of FY23F earnings). As MISC’s balance sheet is solid, with a net gearing at 0.3x in 2Q22, we believe it is capable of funding the equity portion of net capex estimated at USD140m, assuming 70% debt financing. We maintain earnings estimates as we had already factored in similar contract wins.

• BUY. Our SOP-based TP includes a 0% ESG premium or discount, as MISC’s ESG score of 3.0 is on par with our country median score. 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%. Downside risks: Weaker-than-expected petroleum tanker rates and contract cancellations of long-term contracts. The opposite represents upside risks.

Source: RHB Research - 3 Oct 2022