KEY INVESTMENT HIGHLIGHTS

• MISC's 9MFY24 revenue down -1%yoy and core earnings up +19%yoy; but came in lower than expectations
• Higher profit from increased charter rates, robust upstream activities, higher heavy engineering and marine activities
• Volatile LNG demand posed short to mid-term risk
• Maintain BUY with a revised target price of RM8.95

Maintain BUY, TP: RM8.95. MISC Berhad (MISC)'s 9MFY24 core earnings came in slightly below our yearly earnings estimates at 69%. In consideration of the lower earnings, coupled with other factors including the ongoing volatile LNG demand and the merger exercise with Bumi Armada, we revised target price of RM8.95 (previously RM9.75), but maintain our BUY call for the spillover from upbeat upstream activities and stable long-term charter rates.

9MFY24 normalised earnings up +19%yoy. MISC's 9MFY24 normalised earnings gained +18.5%yoy to RM1.6b. Meanwhile, 9MFY24 revenue dropped marginally by -0.6%yoy to RM9.9b.

Gas Assets & Solutions. 9MFY24 revenue slipped -10.5%yoy to RM2.1b and operating income dropped -29.5%yoy to RM868m. The lower revenue was due to lower earning days from contract expiries and lower charter rates. Meanwhile, the lower income was due to lower revenue and higher vessel operating costs.

LNG spot rates remained modest in 3QCY24 due to low LNG demand in Asia and high inventories in Europe, keeping rates below past levels (YTD average: USD11pMMBtu, -16% from CY23 average). We opine that the weaker rates, due to higher supply and new fleets at sea, as well as disruptions from geopolitical tensions will persist in the near to mid-term, in tandem with the subdued crude oil price movement. However, we believe MISC's continuous strategy to sustain this segment through repurposing vessels could soften the impact of the lower demand and oversupply.

Petroleum & Product Shipping. 9MFY24 revenue rose +5.3%yoy to RM2.7b, and operating income added +21.1%yoy to RM1.1b. The higher performance of this segment was due to lower operating cost, offset by transitional impact from strengthening MYR against USD.

VLCC rates in 3QCY24 stabilized due to rising oil demand in Asia, while mid-sized tanker rates declined due to weaker seasonal demand and slower refinery runs in the US and Europe. Nevertheless, the tanker market remained positive until end-year, driven by strong growth in Atlantic-Asia trade and limited fleet expansion. We believe long-term charter demand will continue to support this segment, notably for VLCCs.

Offshore Business. 9MFY24 revenue slipped -27%yoy to RM1.2b, while operating income fell -59.8%yoy to RM186.6m. The lower performance for this segment was due to lower recognition of revenue from the conversion of a FPSO unit following lower project progress, as well as increasing construction costs of the FPSO.

Relatively stable oil prices and higher demand for new FPSO units, notably in South America, West Africa, and the Asia- Pacific continues to be an upside to this segment, despite the higher cost of newbuilds. Additionally, we believe that the long-term contracts of existing projects, including the recent first oil from the FPSO Marechal Duque de Caxias is set to boost this segment's financial performance in the long run.

Marine & Heavy Engineering. 9MFY24 revenue surged +27.4%yoy to RM2.8b, and operating income increased by +123.9%yoy to RM114.2m. The higher performance was due to higher revenue from Heavy Engineering and Marine projects, as well as project close-out and favourable impact from project hedging.

Upstream capex in Malaysia is expected to remain stable with the current capex for YTD stood at approximately RM26b with expected RM30b in CY24, while global upstream capex is expected to surpass USD600b (approx. RM2.7t). Strong demand for oil and gas supports growth and opportunities in Heavy Engineering for both traditional and renewable energy. Meanwhile, we expect the Marine segment to see growth in vessel conversion due to increased upstream activities and the expanding LNG fleet, though offset by the cyclical lower demand for maintenance services due to the winter season.

Revised earnings estimates. In consideration that the 9MFY24 earnings came in lower than our expectation, we revise our earnings forecast for FY24 and FY25 downward by -5% and -12% respectively. As such, we revise our target price to RM8.95 (previously RM9.75) by pegging a PER of 15x to the revised EPS25 of 58sen. The PER is the marine and shipping industry's 3-Year PER. The revision is also taking into account of the Gas Assets & Solutions segment expecting to face headwinds in terms of lower LNG price, following limited movement during the winter season and increased stocking in the Northern Hemisphere. Additionally, the recent announcement of the merging plans with Bumi Armada, while still in a preliminary stage, poised a few risks which includes: (i) integration risks, (ii) asset value risks, and (iii) financial exposure risks.

Nevertheless, the merger has the potential for MISC to streamline its Offshore segment, by sharing the operational benefits of their FPSO fleet in the long run. This is also coupled with the positive outlook on upstream contractual activities and long- term charter rates, amid ongoing geopolitical tensions and relatively stable oil prices, which will continue to uplift the other segments in the near to mid-term. Hence, we maintain our BUY call for MISC.

Source: MIDF Research - 15 Nov 2024