Downside risks for MISC in a weaker economic environment

This article first appeared in The Edge Financial Daily, on April 9, 2020.

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(April 8, RM7.59)
Maintain the sale with an unchanged Target Price (TP) of RM6.20:
A weaker economic environment could reveal several risks, which prompt us to reaffirm our “sell” rating on MISC Bhd. We expect liquefied natural gas (LNG) yields to decline due to a downward revision of existing contractual conditions or outright breach of contracts. At the same time, in the event of a drop in production, following a ceasefire between Saudi Arabia and Russia, oil tanker rates could weaken in the second half of 2020 (2H20) due to more favorable market dynamics. oil market. We maintain our 12 month sum of parts (SOTP) TP of RM 6.20.

The LNG segment (66% of 2019 basic profit before tax) could present risks of declining profits. As of December 31, 2019, MISC owned 29 vessels, most of which were under long-term contracts with Petronas. The contracts for two of its vessels are expected to expire in the second and third quarters of 2020 (2Q / 3Q20), with two more in 1Q21 with an extension option. A lower charter market rate does not bode well with expiring ships. Additionally, around the world, we have seen China and India trying to invoke force majeure on LNG ships as demand weakens. LNG importers are also asking for a new long-term contract term for existing contracts, which could pose risks to profits.

A potential deal involving Saudi Arabia, the United States and Russia in the coming weeks or months is expected to result in lower oil production. This would have a negative impact on the demand for tankers and lead to lower charter rates. Lower oil production will also likely translate into smaller inventory build-up as demand gradually picks up, resulting in less need for offshore storage. In the near term, we don’t expect MISC to benefit much from the higher oil prices, as its portfolio composition is weighted forward to the spot at 78:28. In addition, all of its very large crude carriers are already on long-term contracts.

MISC is trading above its long-term average price-to-earnings ratio (PER) and does not, in our view, reflect the increasing downside risk, particularly for its LNG segment. We are not making any changes to our 12 month TP based on the SOTP of RM 6.20, which implies a 2020 PER of 16 times, slightly lower than the average for the last 15 years. The main upside risks to our call option include: i) a rebound in global oil prices; (ii) the massive postponement of ship deliveries; and iii) higher than expected oil tanker yields. – Affin Hwang Capital, April 8

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