MISC Berhad - Full Steam Ahead for Ammonia Engines

Date: 
2023-12-01
Firm: 
KENANGA
Stock: 
Price Target: 
7.00
Price Call: 
HOLD
Last Price: 
7.52
Upside/Downside: 
-0.52 (6.91%)

MISC aims to achieve its greenhouse gas (GHG) intensity target by 2030 through a phased replacement of its fleet with vessels using carbon-neutral fuels and enhancing the carbon efficiency of the existing fleet. The group is working with WinGD, a Swiss marine power company, to develop ammonia engines, focusing on the safety and health concerns of using ammonia to power its vessels. We maintain our TP of RM7.00 and MARKET PERFORM call.

We came away from MISC’s sustainability briefing feeling reassured of its ESG initiatives. The key takeaways are as follows:

1. ESG targets. The group has reiterated its commitment to reduce greenhouse gas (GHG) emission intensity by 50% by 2030 from its base year of 2008. MISC plans to achieve this by enhancing the fuel efficiency of its current shipping fleet as it gradually switches to vessels using carbon-neutral fuels.

2. Addressing safety and health concerns of ammonia engines. MISC signed an agreement in June 2023 with WinGD to develop ammonia engines for deep-sea vessels. In July, WinGD announced that the company is on track to deliver its first X-DF-A dual-fuel ammonia engines by the first quarter of 2025, with the first X-DF-A powered vessels in service from 2026. Nevertheless, the group is prioritising health and safety measures to ensure a safe operating environment. MISC has also started a training programme for its crew in collaboration with shipping classification society DNV to meet workforce needs for a net-zero path way.

3. Better carbon efficiency in existing vessels. MISC’s current fleet still has room for carbon efficiency improvements, with the company proposing to reduce carbon emissions by slowing down the travel speed of existing petroleum and LNG vessels during charters. Clients (vessel charterers) have expressed their willingness to accept slower delivery times as well as share the additional costs with MISC, as they align their efforts to meet lower carbon emission targets.

4. The energy transition initiatives are unlikely change MISC’s depreciation policy for its current shipping vessels, even with potential shifts in shipping standards due to stricter carbon emission requirements. The company noted that charterers typically choose to fulfil existing contracts for its vessels, citing a past example where older single-hull vessels were allowed to complete their life cycle during the transition of industry vessels from single-hull to double-hull.

Forecasts. Maintained.

We maintain our SoP-TP of RM7.00 with a 5% premium due to its 4- star ESG rating as appraised by us (see page 5).

We like MISC due to: (i) its recent fleet expansion and modernization, (ii) its success in securing mega FPSO projects (i.e. Mero-3) and new contracts from international clients, (iii) its decent dividend yield, and (iv) the long-term growth trend in LNG business due to structural increase in demand. However, demand for petroleum tankers is slowing on sustained OPEC+ production cuts. Maintain MARKET PERFORM.

Risks to our call include: (i) lower-than-expected utilisation and spot rates for its fleet, (ii) Mero-3 additional cost overruns and project delays, and (iii) further production cuts by major oil producers.

Source: Kenanga Research - 1 Dec 2023

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