KUALA LUMPUR (Oct 14): RHB Investment Bank Bhd sees MISC Bhd’s recent share price weakness as an accumulation opportunity due to the company's solid operating cash flow growth of 10% to 15% predicted for the next two years, anchored by new asset additions and decent dividend yields.
RHB analyst Sean Lim, after attending a conference call with MISC’s management, in a note today said the group’s Mero 3 project, if successfully delivered, will open up more premium floating production storage and offloading (FPSO) leasing opportunities.
He cited the management as saying that MISC had received more FPSO tenders subsequent to the signing of a letter of intent with Petrobras. The successful delivery of this project should allow it to penetrate the Americas and West Africa.
To recap, Petrobras has awarded MISC a 22.5-year FPSO Mero 3 contract. The latter has identified its own very large crude carrier (VLCC), Bunga Kasturi 2, for conversion. The total conversion process will take about 40 months, whereby offshore hook-up and commissioning are scheduled to be in the second half of 2023 with final acceptance by the first half of 2024.
Lim also cited MISC's management as saying that Siemens and Aker Engineering will be MISC’s technical partners for topside modules and procurement matters while it looks to finalise Chinese yards for fabrication and hull conversion works by the end of this year.
“Under such an arrangement, MISC will reduce its reliance on local contractors, which could be two to three times costlier in certain aspects, but may potentially be subjected to a penalty as a result of not complying with the 40% local content requirement,” he said.
He also noted that the company will monetise the asset (about a 50% stake) only upon final acceptance unless the potential equity partner can contribute technical expertise during the conversion period.
According to Lim, MISC’s share price has weakened more than 10% in the past one month, dragged down by weakening tanker rates, no thanks to weak oil demand and excess tanker tonnage.
“We expect rates to improve seasonally, albeit at a relatively weaker quantum in the fourth quarter of 2020, as winter approaches,” said Lim.
He opined that rates could improve in the financial year ending Dec 31, 2021 (FY21), from current levels, as the Organization of the Petroleum Exporting Countries (OPEC) is slowly ramping up its production, but rates could still be weaker year-on-year (y-o-y) due to normalisation from abnormally high rates in the first half of 2020.
“The impact on near-term earnings is expected to be manageable as MISC’s term-to-spot ratio for its fleet within the petroleum segment as at the second quarter of 2020 was 76:24,” he added.
Lim maintained his estimates for MISC as he expects a weaker second half due to moderation of tanker rates.
He also maintained his "buy" call for the stock but lowered the target price (TP) to RM8.53 after reducing the petroleum segmental valuation to 1.3 times price-to-book value from 1.5 times to reflect weaker sentiment amid a cautious outlook.
“[Our] dividend per share [forecast] of 30 sen is kept, in view of its robust capex expansion plans — catering especially to massive offshore projects,” he said.
MISC fell 16 sen or 2.34% to RM6.69 in morning trade today, valuing the company at RM30.58 billion.