MISC has signed a letter of intent (LOI) with Petronas LNG for a 15- year charter of two LNG carriers starting in FY27. Additionally, MISC has agreed to terminate the existing charters for three of its Seri AAB vessels, with compensation, and has secured extensions for its two Seri AA vessels, extending into 2028. While the new LNGC charter win is positive, the earnings and valuation accretion appear marginal. We maintain our earnings forecast, but lift TP to RM8.11 and maintain our MARKET PERFORM call.

Following the awards in April 2024 signed with Qatar Energy, MISC announced that it has signed a letter of intent (LOI) with PETRONAS LNG Sdn. Bhd. (PLSB) for the provision of long-term LNG shipping services to PLSB and/or its subsidiaries, which includes the time charter of two newbuild LNG carriers (LNGCs) for a firm period of 15 years. The new vessels are expected to be built by Samsung Heavy Industries and delivered in 2027.

Concurrently, MISC and PLSB have agreed to the early termination of the time charters for three existing steam LNG carriers: Seri Ayu, Seri Angkasa, and Seri Begawan (Seri AAB). Additionally, they have entered into time charters for two LNG carriers, Seri Alam and Seri Amanah (Seri AA), upon the expiry of their existing time charters.

The time charters for Seri AAB will be terminated, and the vessels will be redelivered on the 20th anniversary of their respective charters in 2027/2028, with MISC receiving monetary compensation from PLSB. Meanwhile, MISC and PLSB have agreed to enter into new time charters for Seri AA upon the expiry of their current contracts (in 2025 and 2026), extending until 31 March 2028. Based on our preliminary calculations, the combined effects of the above are expected to be largely earnings-neutral.

On capex of new builds that is currently c.USD200m, unless the rates entered into are better than the spot LNG shipping rates of USD70,000/day we have observed lately, we estimate an annual earnings contribution would only be c.RM4.5m, amounting to 0.4% of FY24F earnings for the two vessels combined. On a WACC of 7%, the expected accretion to the group’s SOP valuation is therefore only RM0.02/share.

Forecasts. Maintained

Valuations. We raise our SoP-TP slightly to RM8.11 from RM8.09 as we factor in the DCF from the two new LNGC. There is no change to our valuation based on ESG given a 4-star ESG rating as appraised by us (see Page 5).

Investment case. We like MISC for its: (i) exposure to the booming petroleum tanker market globally due to high demand for long voyages due to the Red Sea conflict, (ii) large recurring earnings base which provides the ability to pay consistent dividends (3.8% for FY25), and (iii) huge balance sheet which enables the group to bid for more capital intensive FPSO jobs. However, the incoming FPSO Mero 3 (accounting for 8% of our SoP-valuation) project’s execution risks remain high particularly when final acceptance is approaching in early 4QFY24. Maintain MARKET PERFORM

Risks to our call include: (i) lower-than-expected utilisation and spot rates for petroleum fleet, (ii) additional cost overruns and project delays for Mero-3, (iii) further weakness in the global LNG shipping markets, and (iv) risk of non-approval of the deal.

Source: Kenanga Research - 2 Oct 2024