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Monday, July 9, 2018

MISC Berhad - Long-term Contract From Hess

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Last Friday, MISC announced the signing of a 16-year FSO bareboat charter contract with Hess worth USD441m, commencing by 1-Sep-2018. Little impact on FY18, and roughly 1% revenue impact towards FY19, based on RM4.05/USD exchange rate. As such, no changes to FY18- 19E numbers for now. Maintain OUTPERFORM, with unchanged TP of RM7.15, as we see buying opportunity on further share price weakness.
Long-term charter contract from Hess. Last Friday, MISC announced that it has signed a 16-year long-term charter contract with Hess Exploration and Production Malaysia B.V. (Hess) for the lease of a floating, storage and offloading facility (FSO), known as FSO Mekar Bergading, on a bareboat basis. The contract value is estimated to be USD441m, and will commence latest by 1 September 2018.
Positive earnings impact. Based on an assumed USD/MYR exchange rate of RM4.05/USD, the contract is estimated to provide an additional revenue impact of roughly RM112m per annum, representing around 1% of FY18-19E revenue. Assuming 50% margins from the contract would translate to a positive impact of around c.3% to the group’s bottom-line earnings. However, do note that FY18 would only see a four-month impact from the contract, given its September commencement date. All-in, we opt to make no changes to our FY18- 19E numbers for now. Nonetheless, the securement of this contract does indicate the group’s desire to seek growth opportunities within the offshore space, outside its forte in the stable LNG shipping segment.
Overall, expecting weaker FY18-19E earnings. On a bigger picture, we are expecting FY18-19E earnings to be weaker, plagued by continued losses in its petroleum shipping segment as spot petroleum shipping rates continue to show little signs of recovery on the back of tonnage oversupply. As at end-1Q18, 45% of its petroleum shipping portfolio is on spot charters, and as such, any continued weakness in spot rates would be immediately detrimental to earnings of the group. Nonetheless, bulk of the group earnings are still sustained by long-term LNG charters. The group’s low net-gearing of around 0.2x also allows it to be well-positioned for further investment opportunities.
Maintain OUTPERFORM, as we see buying opportunity upon further share price weakness amidst poor broad market sentiment of late. We believe that the group’s core business is largely unaffected by recent geopolitical developments, while also being a beneficiary of a weakening Ringgit. We are keeping our TP of RM7.15 unchanged, pegged towards 0.9x PBV on FY19E, which is roughly -0.5SD from its 5-year mean. Risks to our call include: (i) weaker-than-forecasted charter rates, (ii) stronger-than-expected MYR/USD exchange rates, (iii) lower-thanexpected number of operating vessels, and (iv) slowdown of global LNG and petroleum shipping activities.
Source: Kenanga Research - 9 Jul 2018

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