• Reiterate BUY, unchanged MYR8.94 TP (SOP), 17% upside with c.5% yield. We are generally positive on MISC’s three new LNG carrier charter contracts, which should increase its recurring income base. However, we think it has to lock in much stronger charter rates than the current spot rates in order to fetch decent project returns, given the elevated asset prices.

• New LNG carrier contracts. MISC has been awarded 15-year long-term time charter contracts by Qatar Energy for three newbuild LNG carriers. The vessels will be built by Samsung Heavy Industries Co Ltd and the contracts are set to commence in 2026. Although we are generally positive on the contract wins for expanding MISC’s fleet size and enhancing its recurring income profile, we have some reservations on the potential returns of these contracts, pending further disclosures by management. Note that MISC currently has 31 LNG carriers, as of end-FY23 (30 owned, 1 chartered-in) and another 14 newbuilds (including 12 25%-owned vessels to be chartered to Qatar Energy). These three vessels will have a capacity of 174,000cbm each, similar to its previous contract win.

• IRR could be unexciting. While there is limited disclosure on the contract, we note that the project IRR could be rather unexciting, as asset prices are now more expensive compared to MISC’s previous contract win. The cost of building a new vessel is now c.USD265m (+14% from the average cost in 2022). Assuming that capex is locked in at USD260m, we estimate that the daily charter rate would need to be at USD90,000-110,000/day to fetch a project IRR of 7-10%. Note that spot charter rates fell below USD50,000/day at end-March – lower than the average 1-year and 3-year time charter rates of USD65,000/day and USD70,000/day in January.

• Earnings estimates maintained. Assuming each vessel costs USD260m, with a 15-year firm tenure and USD100,000/day DCR, the IRR would be c.8%. At 7.5% WACC, we value the contracts at MYR0.03/share, with MYR60m net profit contribution (<3% of FY25F earnings). As MISC’s balance sheet is solid, with net gearing at 0.25x in 4Q23, we believe it is capable of funding the equity portion of net capex estimated at USD234m, assuming 70% debt financing. We maintain our earnings estimates as we had already factored in similar contract wins. Our TP stays at MYR8.94 with an unchanged 4% ESG discount baked in. We still like the company for its steady operating cash flow – with anticipation of a boost from the Mero 3 project from 2H24 – and undemanding valuation of 14.8x FY24F P/E, below its 5-year mean of 16x.

• Downside risks: Higher vessel operating costs, contract termination, and regulatory risks.

Source: RHB Research - 2 Apr 2024