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Monday, July 9, 2018

MISC - Secured USD441m FSO Contract

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MISC has secured a 16-year FSO bareboat charter contract from HESS worth USD441m. It is positive to MISC by enhancing its recurring income (+1-2% of FY19 earnings) but not a total surprise to the market with it being mentioned in the previous briefing. Following the transfer of coverage, we project MISC’s earnings to fall 25% YoY to RM1.6bn in FY18 with gradual improvement subsequently. All in, maintain HOLD call on the stock with lower SOP-driven TP from RM6.25 (from RM6.81) as near term earnings risk has been priced in with YTD share price decline of 20% backed by dividend yield of 5%.


MISC has signed a long-term bareboat 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. The contract value is estimated at USD441m for 16 years and the charter will commence latest by 1 September 2018.


Additional recurring income. This is not a total surprise to the market as the management has highlighted the possibility of securing a FSO deal in the analyst briefing held last month. We believe this contract win is positive to MISC by generating additional recurring income for its offshore segment. While the capex needed for the project is not disclosed, we estimate this to range from USD205-230m assuming project IRR of 9%-11%, which is also within management’s guided growth capex target of USD600m in FY18. However, impact to bottomline is rather minimal, contributing only 1-2% of our FY19 earnings estimates. Currently MISC has 145 floating solutions (6 FPSOs, 5 FSOs, 2 MOPUs and 1 semi-submersible floating production system).
Expect weaker earnings in FY18. Following the transfer of coverage, we project MISC earnings to fall by 25% to RM1.6bn, on the back of weaker charter rates as well as weaker USD vs MYR on an average basis YoY. Subsequently, we expect its FY19- 20 earnings to recover by 11%/9% to RM1.7bn and RM1.9bn respectively with gradual improvement in charter rates.
Maintain HOLD, TP lower to RM6.25. Maintain HOLD with lower TP of RM6.25 (from RM6.81) with lower SOP assumptions following the transfer of coverage. Recall that the management has guided its core operating cash flow to drop 10% YoY to USD1.2bn and would intend to maintain its 30 sen DPS as long as the business environment does not turn sour significantly. Near term earnings risk has been priced in with YTD share price decline of 20% backed by dividend yield of 5%.
Source: Hong Leong Investment Bank Research - 9 Jul 2018

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