What Happened

• The KL Regional Centre for Arbitration has ruled in favour of MISC for its contractual disputes with Sabah Shell Petroleum Ltd (SSP). To recap, back in Sept-16, MISC’s wholly-owned subsidiary, which owns and operates the Gumusut-Kakap Semi-Floating Production System (GKK), filed claims against its client, SSP. The claims were for outstanding additional lease rates, payment for completed variation works, and other associated costs. Recall that GKK is leased to SSP (start: Oct-14) for 25 years offshore Sabah.

• Based on the adjudication decision, MISC will be awarded, amongst others:- (1) USD255mn (RM1.1bn), being the settlement amount due to MISC for completed variation works, (2) applicable interest; and (3) costs of RM309K. The settlement amount will be paid as increased Day Rates for GKK over the remaining 23 years of its contract (end: 2039)

Our View

• We are neutral on this news as it will result in estimated marginal annual earnings accretion of RM47mn p.a. (RM4.25/USD). This translates to 1.7%-2.1% of FY17E-19F earnings.

• In addition, whilst the lump sum variation work costs were incurred upfront earlier by MISC, payment from SSP will be spread over the next 23 years. Based on our back-of-the envelope estimates, the settlement amount translates to NPV of RM418mn or 9 sen/share (1% of our TP).

• Recall that GKK contributed EBITDA/net profit of RM138mn/RM114mn in FY15. We understand that the corresponding day rate in FY15 has taken into account circa one-thirds of the USD255mn settlement.

Impact

• We incorporate the increased day rates for GKK into our forecasts as per adjudication decision. Following this, our FY17-19 earnings forecast are tweaked upwards slightly by 1.7%-2.1%.

Valuation

• Following the earnings revision, our TP for MISC is raised slightly to RM7.08 (previous: RM6.94) based on 14x CY17 P/E. We maintain our Sell recommendation due to expectations of subdued earnings on the back of vessel oversupply and shortage of offshore and fabrication projects.

Source: TA Research - 15 Feb 2017