Regional Morning Notes: Comprehensive Analysis of MISC Berhad

Broker: UOB Kay Hian

Date of Report: November 15, 2024

Company Overview

MISC Berhad is a prominent shipping company that employs finance lease (FL) accounting for assets with long-term charter contracts. The company operates a diverse fleet, including Very Large Crude Carriers (VLCC), mid-sized tankers like Suezmaxes and Aframaxes, and Floating, Production, Storage, and Offloading (FPSO) vessels under its Offshore division.

Stock Performance and Major Shareholders

The company’s stock data reveals a market capitalization of RM35,487 million (US\$8,252.7 million) with a 52-week high/low of RM8.97/RM7.05. Notable shareholders include Petroliam Nasional Bhd with 51.1% and the Employees Provident Fund holding 11.5%.

Price Performance

Over the past year, MISC’s stock has shown a notable upward trend, with a 14.8% year-to-date increase. The stock price has experienced fluctuations, peaking at RM9.50 in September 2024.

3Q24 Financial Results

The third quarter of 2024 (3Q24) results for MISC underwhelmed, primarily due to additional costs and disputes over certain contractual terms for FPSO Mero-3. This led to a delay in first oil from August 24 to October 30, 2024. Consequently, MISC’s 2024 earnings forecasts were lowered by 14%.

Revenue Breakdown

• Total Revenue: RM2,963.2 million (down 11.0% qoq, 11.9% yoy)
• LNG: RM674.2 million (down 2.1% qoq, 21.7% yoy)
• Petroleum: RM1,160.0 million (down 11.6% qoq, 4.1% yoy)
• Offshore, Heavy Engineering: RM1,160.0 million (down 12.7% qoq, 7.5% yoy)

EBIT Breakdown

• Total EBIT: RM542.8 million (down 31.5% qoq, 16.5% yoy)
• LNG: RM257.7 million (up 3.4% qoq, down 39.8% yoy)
• Petroleum: RM338.4 million (down 15.9% qoq, up 14.2% yoy)
• Offshore, Heavy Engineering: RM-12.5 million (down 108.9% qoq, 70.4% yoy)

Profit Analysis

MISC’s 9M24 core earnings were below expectations, comprising 62%/65% of the forecasts. The petroleum division continued to record outstanding earnings despite a 16% decline qoq, reflecting lower market spot rates. However, negative deviations arose from the LNG and offshore divisions. For LNG, the 3Q24 core profit, excluding RM19m impairments, showed some growth qoq but remained weak compared to past averages due to low utilization of four spot vessels. The offshore division faced delays and additional costs, primarily due to FPSO Mero-3’s first oil delay.

Corporate Exercise: BAB Merger

There have been long-standing market rumors about a potential merger between MISC and Bumi Armada (BAB). Both companies announced a non-binding memorandum to explore a share-based merger of their offshore businesses within a nine-month period. The aim is to form a global FPSO leader by scale, resources, and financial capability. A combined fleet of 13 from MISC and 8 from BAB may rival Modec, currently the world’s largest FPSO player.

Potential Benefits of the Merger

• ESG and Emissions: Aligning with Petronas’ ESG roadmap, there is a long-term risk of divesting high-emission fossil fuel units. The merger could facilitate better alignment with ESG goals.
• Business Segment Matching: The merger would allow for better geographical reach and business matching. MISC lacks Africa presence, while BAB lacks Brazil presence.
• Financial Capability: Combining resources could lead to a stronger financial position and better valuation for the FPSO businesses.

Environmental, Social, Governance (ESG) Updates

Environmental

• Carbon Reduction: Adding new vessels with LNG-dual/ammonia fuel to meet net-zero emission by 2050.
• Green Ship Recycling: Promoting circular economy via green ship recycling to avoid wastage and dispose of aged vessels.

Social

• Diversity: >20 nationalities; >40% female proportion among onshore staff.
• Safety: Lost Time Injury Frequency (LTIF) remains low at 0.08.

Governance

• Rating: Achieved 5/5 rating (FTSE4Good) for governance and supply chain management.

Earnings Revision and Risks

The earnings forecasts for 2024-26 have been cut by 14%/2%/2% due to FPSO Mero-3’s delays and additional costs. The 4Q24 net lease income is estimated to be around RM65m. LNG earnings have been slightly reduced to reflect the risk of persistently lower spot rates.

Valuation and Recommendation

Despite the setbacks, MISC remains undervalued relative to other crude tanker peers. The company benefits from strong EBITDA from an upcycle in petroleum earnings and a step-up in long-term earnings base from Mero-3. The target price has been adjusted to RM9.55 (from RM10.10), implying a 15x 2025F PE, in line with the average five-year PE band. The recommendation is to maintain a BUY rating.

PBT Segmental Breakdown

Key Financials

Conclusion

MISC Berhad’s 3Q24 performance faced significant challenges, primarily due to additional costs and contractual disputes for FPSO Mero-3. Despite these setbacks, the long-term fundamentals and strategic value to Petronas remain intact. The potential merger with Bumi Armada could create a global FPSO leader, enhancing financial capability and market reach. Investors should maintain a positive outlook on MISC, keeping in mind the company’s strong EBITDA and long-term growth prospects.