• Reiterate BUY, with new SOP-based MYR8.94 TP from MYR8.12, 19% upside and c.5% yield. FY23 results surpassed our expectations on better petroleum contribution, with core earnings increasing 6% YoY. 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, or -1.5SD from its 5-year mean.

• Exceeded expectations. FY23 core earnings of MYR2.2bn (+6% YoY) came in above our (108%), but within Street (100%) full-year expectations. The positive deviation is mainly led by better-than-expected tanker rates. A fourth DPS of 12 sen (4Q22: 12 sen) was declared, lifting FY23 DPS to 36sen.

• Results review. MISC recorded 4Q23 core profit of MYR689m (-10% YoY, +32% QoQ) after stripping off MYR74m impairment provisions and MYR12m gain on ships disposal. The stronger QoQ performance was due to lower cost provisions from the heavy engineering (HE) division and stronger petroleum contribution backed by higher tanker rates. FY23 core earnings improved 6% YoY on the stronger numbers from the petroleum and offshore divisions in the absence of the Mero 3 project’s cost provisions. It was partially offset by weaker LNG unit resulting from higher maintenance costs and the loss-making HE division – no thanks to the additional cost provisions.

• Outlook. The Mero 3 project was at 93.5% physical completion as of 4Q23 (3Q23: 92%) and has recently set sail. The vessel is on track to reach the on- site in May 2024 and management expects to receive charter revenue from 4Q24. MISC is comfortable to bid for new FPSO projects together with its partners. Following the delivery of final and third VLCC (Eagle Veracruz) to Shell in January, MISC expects four and 10 new LNG carriers to be delivered in FY25 and FY26 while the term-to-spot ratio within the petroleum division increased slightly to 88:12 in 4Q23 from 85:12 in 3Q23. The overall tanker market outlook remains positive due to strong Atlantic exports and increased crude imports to Asia. It is further supported by a continuous decrease in newbuild orderbook amidst high asset prices and uncertainty over sustainable fuels to be used in the longer run. On the HE division, we believe it will turn around in FY24, backed by a strong pipeline, coupled with ongoing efforts of its recovery claims.

• We maintain our earnings estimates but lift our TP to MYR8.94 with the incorporation of the latest net debt, coupled with an unchanged 4% ESG discount based on an ESG score of 2.8. We also lifted our FY25F DPS to 38 sen in view of stronger operating cash flow. (FY23: 36 sen). Its balance sheet remains solid with net gearing still maintained at 0.25x. Downside risk: Higher vessel operating costs and contract termination and regulatory risks.

Source: RHB Research - 28 Feb 2024