We keep our Underperform call in view of this unexpected twist in MISC's relationship with its erstwhile supportive parent. Our target price remains pegged to a 30% discount to its SOP. De-rating catalysts include continued tough cyclical shipping conditions, and the almost certain decline in its LNG shipping earnings. MISC will announce its 2Q results on 16 August and we keep our forecasts unchanged till then. 

Petronas appears to have repudiated its traditional charterer relationship with MISC by returning to future ownership of LNG ships. This means that MISC will not be able to sign 20- year contracts for the eight new LNG ships that Petronas is looking to buy. 

What We Think 

This is very bad news for MISC because LNG tanker earnings have helped underwrite the container, petroleum and chemical shipping losses in the past. Over the next five years from 2014-18, contracts for seven LNG ships will expire. We think that five will be renewed at lower rates, and two will not. The net result is that MISC's LNG revenue will fall 20% between 2013 and 2019. If MISC had the benefit of eight new LNG shipping contracts, the shortfall would have been plugged and even allow for some growth. But since this is now no longer possible, we expect LNG division revenues and profits to start declining from 2014 onwards. We will reflect this in our model in the future. 

MISC's share price has done well since the termination of the Petronas general offer, and the stock's subsequent re-inclusion into the FBM KLCI in July. This stock hit a one-year high of RM5.85 on 23 July, narrowing the gap to its SOP of RM6.20 to only 5.6%. The share price dropped to as low as RM3.94 on 4 December 2012, or a 36% discount to SOP. In the unfortunate new reality of MISC's diminished relationship with Petronas, we believe that MISC's share price should once again reflect a large discount to its underlying SOP, in the absence of any cyclical upside catalysts.

Source: CIMB Daybreak - 05 August 2013, Full PDF Report