Fair Value : RM6.47 | Recom : Trading Buy

Selling half stake in Gumusut-Kakap semi-FPS. MISC is selling half of its stake in wholly-owned Gumusut-Kakap semi-floating production system (FPS) to sister company Petronas Carigali for US$305.7m (RM934.4m) cash. Apart from the disposal proceeds, MISC will also receive US$1.4bn (RM4.4bn) from Gumusut-Kakap semi-FPS arising from the settlement of inter-company loans owed by Gumusut-Kakap semi-FTP to MISC. As such, MISC will raise a total of US$1.7bn (RM5.3bn) from the transaction.

Disposal at cost, but de-gearing is the point. At the price, MISC is disposing of the stake at 1x net asset value. This is pale in comparison with offshore oil & gas company Bumi Armada that trades at 2.9x net asset value. However, given the very trying time for the shipping industry (MISC included) at present, balance sheet certainly takes precedence over P&L and we believe MISC’s move is highly sensible. Ceteris paribus, the RM5.3bn raised from the transaction will halve MISC’s net debt and gearing of RM10.4bn and 0.5x as at 30 Jun 2012 to RM5.1bn and 0.25x. MISC is still very well positioned to ride on the upside from the project as it still owns a 50% stake in the venture. We believe the deal will go down well with the market.

Forecasts. Maintained as we have yet to reflect in our forecasts specific contributions from the project (that is still under construction at present with “sailout” guided by MISC in Apr 2013).

Risks to our view. The risks include: (1) A prolonged downturn in the shipping sector; and (2) Higher-than-expected bunker cost.

Maintain Trading Buy. The continued lending curb on the shipping sector by European banks is pushing more shipping companies to the brink. With the long overdue consolidation in the global shipping sector now shifting to a higher gear, there is a stronger likelihood that a sustainable recovery can eventually ensure. From the viewpoint of a forward-looking equity investor, we believe the time is about right to position for the recovery, at least from a trading perspective. We believe MISC fits the bill for a shipping recovery play backed by: (1) A steep decline in share price from 1-year high of RM7.18; (2) The worst in terms of its financial performance that is already over; and (3) Its superior solvency strength as a 62.7%-owned unit of Malaysian national oil company Petronas. Indicative fair value is RM6.47 based on 1.3x book value of RM4.98/share.

Source: RHB Research - 8 Oct 2012