• Reiterate BUY and MYR8.12 TP, 13% upside and c.5% yield. 9M23 results came in within our expectations. Despite a lower QoQ quarterly DPS of 7 sen announced, we still believe MISC is capable of delivering 36 sen (FY22: 33 sen) in FY23-25. We continue to like the company for its steady operating cash flow – with anticipation of a bump-up from the Mero 3 project starting 2H24 – and undemanding valuation of 14x FY24F P/E, ie -1.5SD from its 5-year mean.

• Within expectations. 9M23 core earnings of MYR1.5bn (+15% YoY) came in within our full-year expectations (75%) but below Street’s (66%). A third DPS of 7 sen (3Q22: 7 sen, 2Q23: 10 sen) was declared as expected.

• Results review. MISC recorded a 3Q23 core profit of MYR520m (+7% YoY, +25% QoQ) after stripping off USD20m in one-off repair costs recognised under the offshore arm. The stronger QoQ performance was due to lower cost provisions from the heavy engineering (HE) division. This was partially offset by weaker petroleum contributions. 9M23 core earnings improved 15% YoY on the stronger numbers from the petroleum and offshore wings in the absence of the Mero 3 project’s cost provisions recognised in 1Q23. It was further anchored by a better LNG unit on the back of lower vessel operating costs but partially dragged by the lossmaking HE arm – no thanks to additional cost provisions.

• Outlook. The Mero 3 project was at 92% physical completion as of 3Q23 (2Q23: 89%) and is on track for delivery in May 2024. Management expects to receive charter revenues starting from 4Q24. There will be four and 10 new LNG carriers to be delivered in FY25 and FY26 while the term-to-spot ratio within the petroleum division reduced slightly to 85:15 in 1Q23 from 88:12 in 2Q23. We expect petroleum spot tanker rates to recover QoQ in 4Q23 due to firm Atlantic exports, acceleration in refinery runs, and seasonal trends. The overall tanker market is still likely to be supported by a continuous decrease in newbuild orderbooks amidst high asset prices and uncertainty over sustainable fuels to be used in the longer run. The weak offshore performance during this quarter was dragged by additional cost provisions related to an FSO incident earlier this year – MISC hopes to recover through insurance claims. On the HE division, negotiations for the recovery of the cost provisions are still ongoing – MISC hopes to finalise the claims in the near term.

• With no changes in our estimates, our TP (SOP) is kept at MYR8.12 with the incorporation of an unchanged 4% ESG discount based on an ESG score of 2.8. Despite quarterly DPS dropping QoQ to 7 sen (2Q23: 10 sen), it is still within our expectations. We reckon that MISC is still capable of paying a full-year DPS of 36 sen (FY22: 33 sen) in FY23-25. Its balance sheet remains solid with net gearing still maintained at 0.26x as of 2Q23.

Source: RHB Securities Research - 23 Nov 2023