Highlights/ Comments

In light of surge in demand for LNG around the world (including Malaysia), Petronas has stepped up efforts to invest and secure new gas resources locally e.g. MLNG4, Kanowit and Rotan, and around the world e.g. Gladstone (Australia) and Northwest Pacific (Canada).

Being a subsidiary and partner to Petronas, we expect MISC to be awarded long terms contract to supply new LNG ships to support Petronas LNG projects. MISC has called tenders for 4+4 LNG shipbuildings, which is expected to start deliveries by end-2015 (coincides with commencement of Petronas new LNG projects). The 8 ships will increase MISC capacity by ~35% to 4.6m cbm.

We expect Petronas to require at least another 5 LNG ships to support its LNG shipments from 50% stake in Northwest Pacific, Canada (assuming export permit granted by Canada government), which will increase MISC capacity by another ~16% to 5.35m cbm.

MISC to benefit from the increasing demand for LNG ships from Petronas (and other 3rd party LNG exporters) as well as the higher LNG ship charter rates. LNG division contributed US$400m or 85% of MISC’s PBT in FY12.

Petroleum and chemical tankers continued to be plagued by the oversupply of ships and high operating cost. However, we do not expect further downside from current charter rates given fewer ship deliveries (orderbooks) and current loss-making situation. We only expect charter rate to improve starting 2015, when deliveries slowed down further.

MISC is also actively managing its fleet to contain losses, through restructuring fleet size, cost control programs and lock-in long term charters.

Risks

• Continued oversupply of petroleum and chemical ships, depressing charter rates further.
• Increased in bunker cost.
• Slow recovery of global economy.

Forecasts

Refined our forecast in FY13 by +3.0%, FY14 by +2.3% and FY15 by +0.3%.

Rating

BUY

Positives –

• Potential synergy from VTTI.
• Stronger earnings post disposal of Liner Division.
• Strong support from Parent Group, Petronas.

Negatives –

• Slow down in global economy growth.
• Continued oversupply of tankers, pressuring freight rates.
• High bunker cost.

Valuation

Increased Target Price to RM6.50 (from RM5.20) based on 10% holding company discount to SOP, on improved sector outlook.

Source: Hong Leong Investment Bank Research - 31 Jul 2013