Potential rerating catalyst seen for MISC if it wins Petrobas job

This article first appeared in The Edge Financial Daily, on February 6, 2020.
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(Feb 5, RM7.96)
Reiterate outperform with an unchanged target price (TP) of RM8.90:
To recap, MISC Bhd has been bidding for Petrobras’ Mero-3 floating production and offloading (FSPO) contract in Brazil. Based on industry sources, competition includes Japan’s Modec Inc and Netherlands-based SBM Offshore NV. Despite earlier reports suggesting that Petrobras postponed the bidding date to June 2020, from March 2020 currently, latest reports are now confident that the March deadline stands.

Note that the bidding date has already been pushed back once, with the prior submission date being December 2019, to encourage more bidders to participate. With the March bidding date, we believe the contract is likely to be awarded in the fourth quarter of financial year 2020, ending Dec 31, 2020.

We believe that should MISC win Mero-3, the contract award will definitely serve as a rerating catalyst. From our back-of-envelope calculation, we estimate the contract would add an incremental fair value of about 90 sen per share to our current TP (based on assumptions of US$2 billion capital expenditure, 12% internal rate of return).

Currently, industry experts put SBM Offshore as the favourite to win, with the company having also previously won the Mero-2 contract. Thus, this possibly gives the Dutch company an operational and pricing advantage, with MISC seen as a dark horse.

Outside of FPSO bids, the company is also actively increasing exposure to term charters (as opposed to spot market), thereby improving future cash flows and earnings visibility.

MISC is scheduled to have seven shuttle tankers delivered throughout 2020, all with attached charter contracts of over five years. This would help drive earnings growth for the financial year ending Dec 31, 2020 (FY20) to FY21.

Although MISC was the best-performing FBMKLCI composite stock in 2018, we believe its recent share price weakness, especially given the backdrop of weak overall market sentiments of late, could provide a buying opportunity.

In uncertain times like these, investors may appreciate MISC’s defensiveness, underpinned by its stable and consistent dividend payouts (yielding about 4%), which are relatively decent among blue-chip counters, while also providing visible earnings growth.

Risks to our call include weaker-than-forecasted charter rates, stronger-than-expected ringgit, lower-than-expected number of operating vessels, as well as continued and sustained slowdown in the global economy. — Kenanga Research, Feb 5