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This article first appeared in The Edge Financial Daily on October 11, 2019

MISC Bhd
(Oct 10, RM8.04)
Maintain buy with a higher target price (TP) of RM8.50:
Spikes in petroleum tanker rates will lift MISC Bhd’s earnings for the fourth quarter of financial year 2019 (4QFY19). We raise our FY19 to FY21 earnings per share (EPS) forecasts by 12%/9%/9% respectively as we impute stronger tanker rates and deliveries of seven new shuttle tankers. Our sum-of-the-parts-based TP has also been raised to RM8.50 as we impute potential shipping contract wins in 4QFY19 (capital expenditure: US$1 billion [RM4.19 billion]) and update our petroleum tanker division valuation.

 

In early October, spot charter rates of very large crude carriers, Suezmax and Aframax shot up three to four times (versus the 3QFY19 average). Events leading to the spikes in charter rates included: i) drone attacks on Saudi Arabia’s oil facilities; ii) US sanctions on China Ocean Shipping Company (Cosco) oil tanker units; and iii) Exxon Mobil’s banning of Venezuela-linked vessels.

In our view, the sharp run-up in oil tanker rates was largely due to uncertainties, rather than fundamental factors. In total, we estimate that the affected vessels of Cosco and the Venezuela-linked vessels account for about 7% of the world’s total fleet. We think the high rates may come off but it may still take two to four months to reach equilibrium as it takes time for ships to move around and sort out insurance issues. That said, supply may be tighter, with tanker rates higher year-on-year, in 2020.

Given that 35% of MISC’s oil charters are in the spot market, we expect strong tanker rates to lift its 4QFY19 earnings. We raise our FY19 to FY21 EPS forecasts as we tweak our petroleum earnings assumptions: i) raising the blended charter growth rate to 20% for FY19 (from 10% previously); and ii) raising the profit before tax margin to 4% per annum for FY19 to FY21 (from 0%/2%/2%). We expect the seven new shuttle tankers and the disposal of loss-making chemical tankers to support its margins in FY20 to FY21. — Maybank IB Research, Oct 10

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