This article first appeared in The Edge Financial Daily on September 6, 2019

MISC Bhd
(Sept 5, RM7.49)
Maintain hold with an unchanged target price (TP) of RM6.99: We joined an engagement session hosted by MISC Bhd’s top brass, comprising group managing director and president Yee Yang Chien and vice-presidents of finance (Raja Azlan Raja Azwa) and corporate planning (Emran Othman). We left the session feeling positive on the group’s prospects moving forward. The following are some of the key takeaways:

Core earnings for the second quarter of financial year 2019 (2QFY19) came in at RM409.4 million (-13% quarter-on-quarter [q-o-q]; +27% year-on-year [y-o-y]), bringing the first half of FY19 (1HFY19) core earnings to RM878.7 million (+39% y-o-y). The results were within both our and consensus expectations at 51% of full-year estimates. As expected, second interim dividend of seven sen per share (ex-date: Aug 27; payment date: Sept 18) was declared (similar to 2QFY18).

In terms of the mid-term outlook, a lot of projects last year will be delivered by November. Two shuttle tankers won in 2017 will be delivered in October, but we will not see meaningful contributions until 2020. Next year, five more shuttle tankers will contribute on a full-year basis. The group has a mezzanine of assets coming into service in 2020 to 2022, which will boost operating cash flow.

It was a slow 1HFY19 with very few tenders coming to the market, as invitations to bid never came out. However, in the past two months many things came to life as all invitations to bid became official. MISC’s management guided that the group should have a busy finish in December.

In FY19, MISC has a capital expenditure (capex) target of US$1 billion (FY18: US$970 million), with a very strong chance of securing a sizeable job for its shipping division in October. We understand that the group’s combined tender book stands at about US$4 billion at this juncture. With respect to the Libra field (Brazil) Mero 3 — floating production storage and offloading (FPSO), the invitation to bid came out from Petrobras in July (US$2 billion investment over a 22-year tenure) and will be submitted mid-December. MISC has secured partners for the engineering, procurement and construction portion and is working on securing the funding. The management guided that the award outcome will come only in late first quarter of 2020.

In petroleum shipping, the lightering business is a recurring business, but will shrink over time given the race to develop terminals with very large crude carriers’ offloading capabilities as well as pipelines in the Gulf of Mexico. Five years ago when shale oil became a phenomenon, MISC already took a stance that the lightering business had entered its sunset phase. The company will right-size ahead of time, but for now, it is benefitting from export lightering side given that the US is now an oil exporter.

There is no change in our forecast. Greenfield FPSO projects remain the growth focus for MISC’s offshore segment, but at this juncture we do not factor any project wins in the near term pending crystallisation of bids

Note that MISC’s operating cash flow has improved 45% y-o-y in 1HFY19 on the back of stronger earnings. That said, we believe the company will maintain its dividend per share at 30 sen this year (flat y-o-y) for expansionary capex, implying a dividend payout of 78% yielding 4.2%. — Hong Leong Investment Bank Research, Sept 5