• Stay NEUTRAL and MYR7.79 TP, 10% upside. Post an engagement session with MISC’s outgoing President/Group CEO Datuk Yee Yang Chien, we remain cautious over the delays and cost overruns on the Mero 3 project, with more provisions to be recognised in 2Q22 amidst potential impairment on expiring LNG vessels. Despite this, there could be potential LNG carrier wins in the near term, while operating cash flow is guided to grow, anchored by new asset additions.

• More Mero 3 provisions. MISC could incur more cost provision in the upcoming 2Q22 results to factor in the impact of further progress delay led by the China lockdowns (manpower movement restrictions and quarantines, longer equipment clearance at the port, etc) and higher procurement cost amidst supply chain disruption. It submitted force majeure notices based on two events: The Ukraine-Russia war and China’s lockdowns – the latter has been recognised by Petrobras, with the possibility of pushing back the delivery date (originally 1H24) without being subjected to liquidated damages (maximum exposure <5% of total contract value). The all-in capex including warranty and finance cost during the construction period is guided at c.USD2bn. Recall: MISC made a 1Q22 cost provision to factor a 3-month delay. Management does not expect the delay to exceed 12 months in the worst case scenario – which could potentially lead to a contract cancellation. As the cost provision is done prudently, there may be a cost write-back at the end of the construction period.

• Targeting LNG projects and Total’s Cameia EPCIC & O&M jobs. In view of cost uncertainties, MISC is bidding for Total’s Cameia EPCIC and O&M jobs in Angola together with its partner, Saipem. We understand that Total is willing to share certain pricing risk with the contractor for this project. This would allow MISC to strengthen its in-house engineering capabilities and familiarise the market without assuming asset ownership risk during such turbulent times. In the near term, potential win includes Qatar Energy’s 12 LNG carriers bid by a 4-party consortium (CLNG, NYK, K Line, and MISC). There is still no indication for Petronas to award the remaining optional LNG vessels after inking 11 LNG carrier deals in May. MISC is slowing down in the dynamic positioning shuttle tankers or DPST bidding in Brazil, as it wants to focus on “greener vessels”.

• Earnings estimates stay. Apart from Mero 3 cost provision, MISC is likely to incur impairment on several LNG vessels with contracts expiring in the near term. Operating cash flow is still guided to improve this year, backed by the upcoming new asset additions despite having two, two, and then three LNG long-term contracts due in 2022, 2023, and 2024. This would be sufficient to anchor its 33 sen DPS, fetching a decent yield of 4.6%. MISC’s balance sheet remains solid, with net gearing well kept at 0.28x as at 1Q22. SOP-based TP is kept at MYR7.79 with 0% ESG premium/discount applied, as its ESG score of 3.0 is on par with our country median. Downside risks: Weaker-than-expected petroleum tanker rates and unexpected contract cancellations of long-term contracts.

Source: RHB Research - 1 Jul 2022