Thursday 28 Mar 2024
By
main news image

This article first appeared in The Edge Financial Daily, on April 18, 2016.

 

MISC Bhd
(April 15, RM8.92)
Downgrade to hold with a target price (TP) of RM9.30:
MISC Bhd will soon complete the acquisition of the remaining 50% stake in the Gumusut Kakap platform (GKP) from Petronas Carigali Sdn Bhd. The GKP will be a revenue stream (previously joint-venture income) and is expected to raise earnings per share (EPS) by 3% to 4%.

MISC_chart_fd_180416

The GKP offers: i) a strong, approximately 90% earnings before interest and tax margin, and an about 80% core net margin on a finance lease method; ii) predictable cash flow on a remaining tenure of 23 years, and charter rates are fixed for at least 20 years; iii) an implied low interest rate of less than 2%; and iv) sufficient operating cash flow to cover capital expenditure on maintenance and loan repayments at the project level.

Since January 2016, global crude tanker spot earnings have corrected 25% to 35% from the high base in 2015, on concerns that the incoming tanker supply (and less demolition) will exceed demand growth. 

These factors will only affect 2017 earnings materially as the incoming deliveries are heavily allocated in late 2016. MISC’s petroleum margins will remain strong in 2016, due to its high time charter mix (60% to 70% of 81 tankers). Time charter rates for Aframaxes remained steady at more than US$26,000 (RM101,400) per day in the first quarter of 2016 (1Q16), 10% higher year-on-year. 

For 1Q16, we could also see more cost savings as bunker costs year-to-date are 45% below the 2015 average (bunker costs are about 20% of shipping costs). In the future, bunker costs could be capped by savings pass-through to clients and will be reversed in an oil price uptrend.

In recent weeks, ports in China and the Middle East have witnessed “the worst traffic jam in history” due to many crude tankers queueing up to unload cargoes. This could be due to a surge in crude purchases by China’s “teapot” refineries and limited handling capabilities at the ports. Experts opined that the massive “standstill” in tanker backlog will add on to charterers’ business cost (especially for oil traders) and may put a dent in further buying of cargoes. 

Also, the contango play has become unattractive for floating storage. Tankers that come free from the congested ports may also seek urgent re-employment. Vessel congestion had traditionally been positive to tanker rates. However, this event could add to the negative sentiment on tanker demand and chartering. Coupled with the incoming late-2016 global tanker deliveries, we see more near-term volatility in spot rates and market sentiment for MISC.

We still see value from: a) its acquisition of the GKP; b) stable time charters to sustain tanker margins, and c) improvement in timing charter mix to shield against tanker rate declines. 

However, the recent events may lead to further volatility in the vicious circle of tanker rates and may affect sentiment for MISC. Our earnings forecasts are below the consensus as we now expect slightly lower realised tanker rates. We downgrade MISC to “hold”, with a lower TP of RM9.30 (previous TP: RM9.80) and an entry price of RM8.20. — UOB Kay Hian, April 15

      Print
      Text Size
      Share