• Reiterate BUY, new MYR9.84 SOP-based TP from MYR9.35, 15% upside with c.4% FY24F yield. MISC’s1H24 results are within our expectations, with core earnings rising 20% YoY. We continue to like MISC for its steady operating cash flow, on top of the anticipation of a bump-up in numbers due to Mero 3 (expected first oil by late 3Q24 or early 4Q24), from 2H24 onwards.

• 1H24 core profit of MYR1.2bn (+22% YoY) met expectations at 47% and 48% of ours and Street’s full-year estimates. A second DPS of MYR0.08 was declared (2Q23: MYR0.10, 1Q24: MYR0.08), as expected.

• Results review. In 2Q24, MISC posted a core profit of MYR557.8m (+33.6% YoY, -13.8% QoQ) after adjusting for Mero 3 construction gains and impairments. The QoQ drop was mainly due to a weaker performance in the LNG segment, impacted by the loss of two vessels and reduced revenue from a few spot vessels that were not on hire. Additionally, the offshore segment was affected by financing allocations that offset the minimal earnings as the Mero 3 project reaches tail-end of its construction. However, these declines were buffered by stronger performances in the heavy equipment (HE) and petroleum divisions. The better 1H24 core profit of MYR1.2bn was largely driven by improvements in the HE segment, which helped balance out weaker results in the offshore and LNG units.

• Outlook. The Mero 3 has arrived offshore in Brazil and is preparing for first oil, which is expected by late 3Q24 or early 4Q24. This timeline is slightly delayed due to technical issues, but the group will be pursuing the entitled standby rates. Recall that MISC is in discussions with several parties regarding the monetisation of Mero 3, which will be prioritised before tendering for other jobs – particularly larger ones in the MYR2bn range that will be pursued through partnerships. MISC expects four, 11, and two new LNG carriers to be delivered in FY25, FY26, and FY27, while the term-to-spot ratio is 90:10 for the petroleum division, and 80-85:20-15 for the gas division. The overall tanker market outlook remains positive, with increasing long-haul exports from the US, Brazil and Guyana as well as low fleet growth.

• We make no changes to our estimates but our SOP-based TP rises to MYR9.84, after rolling forward our valuation base year to FY25F, with a 4% ESG discount imputed, based on the stock’s revised ESG score of 2.8. MISC’s balance sheet remains solid, with its net gearing still at 0.26x.

• Downside risks: Higher vessel operating costs, contract terminations, and regulatory issues are downside risks.

Source: RHB Research - 26 Aug 2024