This article first appeared in The Edge Financial Daily on October 15, 2019

MISC Bhd
(Oct 14, RM8.40)
Maintain hold with a higher target price (TP) of RM8.61: The tanker rate rally is being driven by expected factors such as the refinery ramp-up in utilisation for winter demand and the production of International Maritime Organisation 2020-compliant fuels, tankers removed from service for scrubber installation, rising long-haul US crude oil exports and the thin tanker order book.

However, very large crude carrier (VLCC) rates would not have exceeded US$300,000/day last Friday (average of US$21,000/day during the first nine months of 2019) if not for a confluence of unexpected events, including the drone attacks on Saudi Arabia on Sept 14, the US sanctions on Cosco Dalian’s ships from Sept 25, the avoidance of ships that had called on Venezuela in the past 12 months by major charterers from early October, and the missile attack on one Iranian VLCC on Oct 11.

VLCC time charter equivalent rates have spiked 12 times from a month ago, Suezmax rates have risen 10-fold, while Aframax rates have tripled.

We expect extremely strong tanker freight rates to last for the next six months due to seasonal winter demand, the ongoing rush to retrofit scrubbers and the shock of recent geopolitical events. Tanker rates may soften after the first quarter of 2020 as the winter impact subsides, and as the Cosco group attempts to convince charterers to employ non-Cosco Dalian vessels.

But rates may remain elevated throughout 2020-2021, as the avoidance of Cosco Dalian and Venezuelan-calling vessels has removed about 14% of the global VLCC fleet and 20% of the global Suezmax fleet from commercial trading. While new shipyard orders are expected to balloon quickly, most new buildings will not be delivered until 2022. As such, average tanker rates in 2020 may exceed the averages achieved in the last tanker upturn in 2015. But tanker rates are also subject to the decisions of one man — the US president — who can with a swing of his hand remove sanctions on Venezuela, Iran and Cosco Dalian, causing tanker rates to plummet.

Our new TP implies a forecast calendar year 2020 price-to-book value multiple of 1.03 times. While this is lower than the peak of 1.4  times achieved in the last tanker market upcycle of 2015, we argue that our TP is reasonable in light of the derating of MISC Bhd’s return on equity as a result of the expiry of lucrative, legacy LNG shipping contracts since 2015. — CGS-CIMB Research, Oct 14