• Reiterate BUY, new MYR8.43 TP from MYR8.10, 15% upside with c.5% yield. MISC’s FY22 results outperformed estimates, due to higher tanker rates and sturdy numbers from its heavy engineering division. Operating cash flow is expected to remain stable before seeing a bump-up from Mero 3, which is on track for delivery by mid-2024. MISC, in our view, stands a chance to win more gas projects going forward.

• FY22 core earnings of MYR2.1bn (+64% YoY) outperformed expectations, at 116% and 114% of our and Street full-year estimates. The positive deviation is due to the stronger-than-expected performance of its petroleum and heavy engineering segments. A final DPS of 12 sen was declared, lifting full-year DPS to 33 sen (FY21: 33 sen), as expected.

• Results review. MISC recorded core profit of MYR767m in 4Q22 (+1.8x YoY; +58% QoQ) after stripping off USD30m in Mero 3 construction gains, and MYR257m in vessel impairments. The stronger QoQ performance was led by improved results from its petroleum division which, in turn, stemmed from higher mid-sized tanker rates and LNG profit. FY22 core earnings also surged by 64% YoY, on the stronger numbers from the petroleum and heavy engineering units. These, in turn, was underpinned by the reversal of cost provisions, dry-docking activities as well as a stronger contribution from the LNG unit (+15%, higher earnings days and lower dry-docking activities). This was offset by the weaker offshore divisions.

• Outlook. The Mero 3 project was 74%-completed as of 4Q22, and is on track for delivery in May 2024. MISC is considering an option to mobilise the vessel to other shipyards for the next phase of work in 2H23. The term- to-spot ratio within the petroleum division increased to 77:23 in 4Q22 from 72:28 in 3Q22, as more Aframax vessels were put on term charters. We expect petroleum tanker rates to taper off seasonally QoQ in 1Q23. Management sees 2023 as a year of execution, with selective opportunities within the gas carrier space. Two LNG vessels were delivered in January this year, with another 25%-owned 12 LNG vessels to be delivered in 2025- 2026. On the other hand, there will be three LNG vessels due for expiry in 2023. Despite global upstream capex being expected to stay high, MISC’s current priority is on the conversion of the Mero 3 project.

• We increase FY23-24F earnings by 2-5% after increasing our projected contributions from the heavy engineering and petroleum divisions. Our SOP-based TP rises to MYR8.43, with a 0% ESG premium or discount applied as per our in-house proprietary methodology. MISC’s balance sheet remains solid, with its net gearing still maintained 0.28x as at 4Q22. Downside risks to our call: Weaker-than-expected petroleum tanker rates, and unexpected contract cancellations of long-term contracts.

Source: RHB Research - 16 Feb 2023