Investment Highlights

• We maintain HOLD on MISC with unchanged sum-of-parts  (SOP) based fair value of RM7.79/share, which implies an  FY23F EV/EBITDA of 8.7x, slightly lower than its 3-year  average of 9x. It also reflects a premium of 3% for our  unchanged 4-star ESG rating.

• We deem MISC’s 1QFY23 core net profit (CNP) of RM689mil  within expectation despite coming at 31%-32% of our FY23F  earnings and street’s. This is premised on anticipation of a  subsequent drop in petroleum tanker charter rates alongside  lower seaborne crude shipping volume over the coming quarters on softening oil demand and production cutsby the Organisation  of Petroleum Exporting Countries.

• Thus, we keep our FY23F-FY25F unchanged. The group also  declared an interim dividend of 7 sen/share, which is flat YoY.

• YoY, 1QFY23 revenue grew by 7% underpinned by higher sales  contributions from petroleum & product shipping operation amid  higher petroleum tanker freight rates. This more than offset lower  revenue from the offshore business segment on lower  construction progress achieved for floating production storage  and offloading (FPSO) Mero 3.

• With the higher revenue, 1QFY23 CNP surged by a larger 84%  YoY mainly backed by increased earnings from petroleum  tankers operations. The offshore business also recorded higher  earnings despite moderatingsegmentalrevenue due tolow-base  effect as 1QFY22 was severely impacted by elevated  construction costs for FPSO Mero 3 amid global supply chain  disruption and lockdowns in China.

• QoQ, 1QFY23 revenue was down by 26% mainly due to a sharp  decline in contribution from the offshore business division on reduced construction revenue from FPSO Mero 3. In tandem with  the decreased revenue, 1QFY23 CNP contracted by 26% on lower  earnings from all key segments.

• In particular, the offshore segment’s EBIT dropped by 47% QoQ  due to lower construction earnings from Mero 3. Meanwhile, EBIT  from petroleum & product shipping (-23% QoQ) as well as gas  assets & solutions (-16% QoQ) segments have also declined, weighed down by lower freight rates and charter contract  expiries. 

• The gas assets & solutions segment remained as the largest  earnings contributor, accounting for 47% of 1QFY23 group  EBIT, followed by the petroleum & products shipping solutions  (38%) and offshore business (20%) segments.  

• We Attended An Analyst Briefing Yesterday With the Following Key Takeaways:

  • In 1QFY23, the petroleum & product shipping division’s average term-to-spot ratio (TSR) continued to  improve QoQ to 84:16 from 77:23 in 4QFY22, supported by the TSR increases from 30:70 to 47:53 for VLCC,  92:8 to 96:4 for Aframax and 73:27 to 86:14 for Suezmax. Management also highlighted that the current  average term exposure of its fleet exceeds its targeted range of 70%-80%, which guarantees a stable earnings  stream despite giving up possible stronger earnings from future elevated spot freight rates.
  • The ongoing conversion of Mero 3 continues to progress as planned and has reached a completion stage of  85% as at the end of 1QFY23, up from 75% in 4QFY22. The floater is on track to be delivered to Petrobras in  2QFY24 and scheduled to commence charter in 2HFY24.
  • Management maintains its capex guidance of US$1bil for 2023 despite substantial cash proceeds to be  received from Petronas Gas due to the US$234mil early settlement of capex hire fees payable (the  outstanding lease receivables which were capitalised based on capex spent on vessels) for the remaining  charter period of its 2 floating storage units at LNG Regasification Terminal Sungai Udang.
  • The group’s LNG carrier fleet has seen a vessel namely Puteri Delima Satu expired in January 2023, which  partially contributed to lower earnings in 1QFY23. We also understand that another 2 vessels are expected  to subsequently expire in 2023, followed by another 3 vessels in 2024.
  • The delivery of 2 new LNG carriers, namely Seri Damai and Seri Daya, to ExxonMobil’s wholly-owned  SeaRiver Maritim is expected to partially make up for the earnings vacuum from upcoming LNG contract  expiries.
• MISC currently trades at a fair FY23F EV/EBITDA of 8.9x, close to its 3-year average of 9x.  

Source: AmInvest Research - 25 May 2023