MISC could benefit as oversupply of oil bullish for its freight rates
Upgrade to trading buy with an unchanged target price of RM8.11: Recall that the US Energy Information Administration cut its global oil demand growth forecast for 2020 by 310,000 barrels per day. Nevertheless, the latest chain of events involving Russia and Saudi Arabia could at least slightly spur some additional demand, albeit by a non-substantial magnitude.
As oil prices continue to remain low, oil traders are looking to hold more barrels as the oil markets face a supply glut caused by a lack of Opec+ cuts and dampened demand due to the Covid-19 outbreak. As such, MISC Bhd could benefit because an oversupply of oil is bullish for freight rates as tonnage will be tightened with more barrels of oil in storage.
So far for the first quarter ending March 31, 2020 (1QFY20), average spot tanker rates have shown a steep decline of more than 50% since the start of FY20 due to subdued winter season which coincided with the Covid-19 outbreak. With 72% of its petroleum vessels (100% for very large crude carrier, 74% for Aframax, and 44% for Suezmax) tied to time charter contracts, we believe that this will shield MISC from huge fluctuations seen in the spot market.
Even for MISC’s liquefied natural gas (LNG) fleet, only four out is 31 vessels (29 LNG and two floating storage units) vessels are only on spot contracts. Moreover, we understand that MISC’s overall exposure to China is quite minimal. Henceforth, we believe that potential earnings disruption to the petroleum and LNG vessel freight rates either from geopolitical conflicts or the Covid-19 outbreak are manageable.
MISC’s LNG segment is expected to remain robust due to the small exposure to the LNG spot market while any force majeure declaration by Chinese firms will still require LNG vessel charterers to honour the contract with MISC being the vessel owner. Apart from that, MISC’s share price remained resilient during the 2014 slump in oil prices.
Valuation-wise, MISC is trading at a price-to-book value (P/BV) ratio of 0.9 times, a discount from its five-year average P/BV of 1.0 times. We expect valuations to be higher if the potential job wins for the offshore segment for FY20 to be worth around US$4 billion which includes floating production storage and offloading (FPSO) Mero 3 and FPSO Limbayong. More importantly, we also favour MISC for its attractive dividend yield of 4.5%. With the knee-jerk reaction to its share price, we opine that this presents an opportunity for investors to accumulate the stock.
Source: MISC Bhd