Investment Highlights

• We maintain BUY on MISC with an unchanged sum-of-parts (SOP) based fair value of RM8.11/share, which also reflects a premium of 3% for our unchanged 4-star ESG rating. Our FV implies an FY23F EV/EBITDA of 9x, at parity to its 3-year average of 9x.

• Our forecasts are maintained following an analyst briefing last Thursday. These are the key takeaways:
  • In 3QFY22, the petroleum & product shipping division’s average term-to-spot ratio remained unchanged QoQ at 72:28 as the increase in term charter ratio in Suezmax from 42:58 to 75:25 and Aframax from 69:31 to 76:34 were largely offset by the decline in VLCC from 70:30 to 36:64.
    Spot rates for Suezmax and Aframax continued trending higher in 3QFY22 due to reshuffling of trade routes prompted by the EU ban on Russian imports as well as higher tonne-mile growth owing to the Russian invasion of Ukraine. Likewise, VLCC rates also surged on increased US crude flows to the Far East and South Asia.
  • The conversion of Mero 3 floating, production, storage and offloading vessel has achieved an improved project execution by end-3QFY22 to reach 59% completion (from 48% in 2QFY22) on the back of normalised operations at CIMC Raffles’ yard in China.
    On the other hand, we note that the group is still engaged in negotiations with Petrobras in a bid to waive liquidated damages and penalties due to delayed delivery of the FPSO.
  • Backed by the higher project progress for Mero 3, we gather that the quarterly construction profit after tax for the project is estimated at US$20mil in 3QFY22 for the offshore business division, which accounted for 18% of MISC’s 9MFY22 operating profit.
  • For the liquefied natural gas (LNG) carrier operations, we understand that daily time charter rates for 12 units of LNG carriers awarded earlier to its 25%-owned consortium by QatarEnergy are likely to be below US$100k/day. Subsequently, daily charter rates have spiked up from tight supply of vessels on the market as well as seasonally stronger demand for LNG ahead of the winter cycle, with both spot and time charter rates surpassing the US$100K/day mark by a wide margin.
    The QatarEnergy charters will only commence from 2026 onwards in which daily rates could likely subside on normalised demand-supply dynamics within the LNG segment. Nevertheless, management continues to foresee these charters to yield at least a high single-digit IRR given the stilllucrative daily rates.
  • Management is also targeting potential contract wins of US$750mil to US$1bil within the LNG shipping operations in 2023, with one of the key drivers being more charter awards from QatarEnergy for its Phase 2 LNG expansion (North Field South Expansion) project.
• MISC currently trades at a compelling FY23F EV/EBITDA of 8x, 11% below its 3-year average of 9x.

Source: AmInvest Research - 21 Nov 2022