(Oct 23, RM8.30)
Maintain hold with a higher target price (TP) of RM7.85: MISC Bhd’s recent liquefied natural gas (LNG) contract wins are encouraging signs and constructive for earnings. However, we believe the positives are priced in with the stock trading at +1 standard deviation of its historical five-year price-earnings and price-to-book value (P/BV) mean. While very large crude carrier tankers are enjoying better rates, this is more than offset by lower Aframax and Suezmax rates. Slower global economic growth could dampen shipping demand.
Although positive, we believe the improving charter rates and new LNG wins are reflected in valuations that are at the higher end of its historical range. The rebound in this year’s earnings is partly due to a lower base in financial year 2018 (FY18), resulting from lower charter rates.
MISC is seeking inorganic growth opportunities, especially for offshore assets. Any acquisition of significant assets could improve group returns, or offer alternative engines of growth. Winning the Mero 3 floating production storage and offloading may be a potential catalyst. That said, we believe it is too early to factor it in with tenders due only in the fourth quarter of 2019 and potential project completion in 2023. We raise our earnings forecasts, factoring in the new LNG contracts and higher valuation for LNG and petroleum shipping in our sum-of-the-parts valuation. Our TP implies one time FY20 forecast book value, which is equivalent to its five-year mean P/BV.
There will be severe changes in crude petroleum shipping rates. Our assumptions are for crude shipping rates to be flattish over 2019 to 2020. A deterioration in global economic growth could dampen shipping rates and weigh on earnings. — AllianceDBS Research, Oct 23