Downside risks for MISC on weaker economic environment

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

(April 8, RM7.59)
Maintain sell with an unchanged target price (TP) of RM6.20:
A weaker economic environment could unveil several risks, which prompt us to reaffirm our “sell” rating on MISC Bhd. We foresee lower liquefied natural gas (LNG) yields on the back of a downward revision of existing contractual terms or outright non-fulfilment of contracts. Meanwhile, in the event of a production cut, following a ceasefire between Saudi Arabia and Russia, tanker rates could weaken in the second half of 2020 (2H20) on the back of more favourable oil-market dynamics. We maintain our sum-of-the-parts (SOTP)-based 12-month TP of RM6.20.

The LNG segment (66% of 2019 core profit before tax) could pose some downside risks to earnings. As at Dec 31, 2019, MISC owned 29 vessels which were mostly long-term contracted to Petronas. Contracts for two of its vessels are expected to expire in the second and third quarter of 2020 (2Q/3Q20), with another two in 1Q21 with an extension option. A weaker charter vessel market rate does not bode well with the vessels set to expire. In addition, around the world, we have seen China and India trying to invoke a force majeure on LNG vessels as demand weakened. LNG importers are also calling for a new long-term contractual term for existing contracts which could pose risks to earnings.

A potential deal involving Saudi Arabia, the US and Russia in the coming weeks or months should lead to lower oil production. This would have a negative impact on petroleum tanker demand and lead to lower charter rates. Weaker oil production will also likely translate into a smaller inventory build when demand gradually recovers, resulting in a lesser need for offshore storage. For the near term, we do not expect MISC to benefit much from higher tanker rates as its portfolio mix is weighted towards term versus spot at 78:28. Moreover, all of its very large crude carrier vessels are already committed to long-term contracts.

MISC is trading above its long-term mean price-earnings ratio (PER) and is not reflective of the growing downside risk, especially for its LNG segment, in our view. We make no change to our SOTP-based 12-month TP of RM6.20, which implies a 2020 PER of 16 times, slightly below the past-15-year average. Key upside risks to our call include: i) a rebound in global oil prices; ii) mass deferment of vessel deliveries; and iii) higher-than-expected tanker yields. — Affin Hwang Capital, April 8