MISC’s job wins expected to drive medium-term earnings
Maintain hold with a lower target price (TP) of RM8.55: MISC Bhd’s third quarter of financial year 2019 (3QFY19) core net profit of RM66.5 million was 3.3% lower year-on-year (y-o-y) as MISC may have incurred miscellaneous costs in its effort to build up its bid book and order book, with these costs offsetting the beneficial impact of lower petroleum tanker losses. On a cumulative nine months of FY19 (9MFY19) basis, its core net profit of RM292 million was 26% higher y-o-y due to: i) a petroleum tanker profit of RM5.4 million for 9MFY19 versus a loss of RM60.7 million for 9MFY18 (due to stronger tanker rates during the first half of FY19; ii) a higher liquefied natural gas (LNG) tanker profit of RM199 million for 9MFY19 versus RM176 million for 9MFY18; and iii) a lower Malaysia Marine and Heavy Engineering Holdings Bhd loss of RM10.3 million for 3QFY19 versus RM23.9 million for 3QFY18 (due to more dry-docking work).
We forecast a core net profit of RM128 million for 4QFY19, the strongest for MISC in FY19, because of the rise in the average level of spot tanker freight rates since October and rising LNG spot shipping rates in conjunction with seasonal winter demand. Our earnings model assumes that MISC will enjoy a 30% y-o-y increase in average petroleum tanker time charter equivalent (TCE) rates in FY20. Meanwhile, spot LNG TCE rates were up 80% to 100% in the first six weeks of 4QFY19 versus the 3QFY19 average, though they were flat y-o-y. MISC has spot exposure to up to four LNG tankers out of its fleet of 29. Separately, MISC contracted to sell seven A-class chemical tankers to Maersk Tankers on Sept 24, of which one was delivered in 3QFY19, while the remaining six will be delivered progressively in 4QFY19 and 1QFY20. These A-class chemical tankers reported pre-tax losses of about US$5 million (RM20.8 million) per annum; MISC would be able to avoid these losses from 4QFY19.
MISC’s recent contract wins would help drive earnings in the medium term, including an LNG bunker vessel contract from 1QFY20, two LNG vessel contracts from FY21 and two LNG vessel charters from FY23. MISC is also bidding for the Mero 3 floating production storage and offloading (FPSO) charter to Petrobras, the Limbayong FPSO charter to Petroliam Nasional Bhd (Petronas) and other FPSO contracts. All the above have been included in our sum-of-parts-based TP and we consider MISC’s share price fair in relation to the former.
Upside risks include MISC’s ability to win more FPSO contracts, including Petronas’ Limbayong FPSO contract, which MISC is bidding for in a tie-up with Yinson Holdings Bhd, and Petrobras’ Mero 3 FPSO contract. MISC appears to have sufficient cash resources to undertake up to US$4.5 billion of project capital expenditure (capex) in FY20 to FY23 without calling for a new equity issue. We forecast that MISC will have a cash balance of US$1.4 billion at end-FY19, and an annual recurring free cash flow of US$600 million-US$700 million in FY20-FY21. This should be enough to fund the 30% equity portion of the US$4.5 billion project capex (US$1.35 billion), which is likely to be spread out over four years in FY20 to FY23, assuming that MISC wins all of its bids. Downside risks include potential execution risks to the Mero 3 FPSO if it wins the bid as it lacks management experience in Brazil. MISC said it had mitigated these risks by recruiting personnel with work experience in Brazil, and it had tied up with Siemens and Sembcorp Marine with a presence in the country.
Source: The Edge Financial Daily