What Happened?

• MISC entered into an agreement with Mitsubishi Corporation (MC) and Nippon Yusen Kabushiki Kaisha (NYK) to co-own two newbuild Liquefied Natural Gas (LNG) vessels (capacity: 174K m3 each). MISC’s interest in the total contract value is estimated at USD201.6mn.

• Each vessel will serve Diamond Gas International Pte. Ltd.’s (DGI) LNG carrier requirements worldwide, particularly LNG volumes from U.S. and Canada. Each vessel will be on time charter contract with DGI for a firm period of 18 years.

• The vessels are currently being built by Hyundai Samho Heavy Industries, with expected delivery in 2021. The time charter contracts will commence upon delivery.

• Both of MISC’s new partners are global companies based in Japan. MC is a global conglomerate with interests in multi-industries (eg. Natural Gas, Industrial Materials, Petroleum & Chemicals, Mineral Resources). Meanwhile, NYK, is a global transportation company that operates ocean vessels, planes and trucks.

• Whereas DGI is a wholly-owned subsidiary of MC that manages sales and marketing of MC’s equity offtake of LNG volumes globally, including from U.S. and Canada.

Our Take

• We are positive on this announcement given:- (1) secure long term contract with a reliable client, (2) diversification from MISC’s traditional LNG market in Malaysia, comprising mainly Petronas contracts, and (3) risk and capital sharing with established partners that may prelude future collaborations. These new contracts fall within management’s guidance of FY19 growth capex of USD1bn.

• We believe there could be more traction in LNG contract awards for MISC. This is given recent industry newsflow reporting that ExxonMobil has prioritized MISC to undertake the first of a series of LNG newbuilds that it intends to order.

Impact

• We incorporate these new contracts into our forecasts. This results in a 2% increase to our FY21 forecasts.

Valuation

• As evident from these new LNG contracts, and coupled with recent contract wins for newbuild DP Shuttles, we believe that MISC is turning aggressive in pursuing earnings growth. Correspondingly, management has identified prospective pipeline projects valued northwards of USD4bn. A sizeable chunk of this comprises bids for offshore FPSOs - including the ambitious USD2bn Petrobras Mero-3 FPSO. This is on top of other FPSO bids for Limbayung in Malaysia (value: USD750mn) as well as Ubud (USD600mn-800mn) and Erawan in Thailand.

• Therefore, we believe that the improved earnings visibility warrants a rerating in valuations. As such, we upgrade the stock’s target to 19x FY19 P/E (previous: 15x). This implies a premium versus international peers’ (big caps) average of 15x. We believe the latter is justified by MISC’s aggressive thrust into the lucrative FPSO space. This segment is now experiencing traction in both tenders and awards.

• As such, our target price (TP) on MISC is raised to RM8.20 (previous: RM6.30). On the back of this, our recommendation on MISC is upgraded to Hold (previous: Sell). We believe that the risk-reward is balanced now, and supported by potential upside in dividend yields.

Source: TA Research - 25 Sept 2019