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Wednesday, October 5, 2016

Brokers Report: MISC Bhd - Poised for stronger 2H



Maintain BUY call with target price (TP) of RM9.50


Highlights


  • MISC announced that it has filed a Notice of Adjudication dated 23 Sep 2016 against Sabah Shell Petroleum Company Limited (“SSPC”) seeking resolution on contractual disputes covering claims for outstanding additional lease rates, payment for completed variation works and other associated costs amounting to approximately US$245m.
  • The above litigation would not post any negative impact to its earnings as the current lease contract terms for Gemusut-Kakap Semi-Floating Production Ltd (GKL) is maintained. In contrast, potential upside could be reaped by the group in the event of successful claim from the legal suit.
  • The group has also just taken delivery of Seri Camelia, LNG vessel built by Hyundai Heavy Industries, 1st of the 5 LNG vessels to be chartered to Petronas for the next 15 years. This is in line with our assumption of LNG vessel delivery in 3Q16 and 4Q16.
  • In the coming years, the group’s core earnings growth would be anchored by these 5 vessels with generation of recurring cash flow, in line with the group’s strategy to focus on assets that generate recurring cash flow. The remaining LNG assets are still under construction in Hyundai’s Korean shipyard and will be delivered to MISC group in a staggered basis.
  • Although LNG market is oversupplied globally with heavy vessel deliveries, MISC is prudent on its business model by not risking its money on speculative LNG newbuilds. The group would only commit into long-term LNG contracts with sufficient IRR on its investments, reducing risk of asset idling.
  • Whilst slightly weaker this year, the Petroleum division of the group is still sustainable given the limited fleet growth expected this year globally. Consolidation of remaining 50% stake of 6 Paramount Aframax tankers would help to lift Petroleum earnings in 2H16.
  • The Offshore business segment remains a stable contributor to the group with existing contracts still largely intact. We expect cash flow and earnings to remain sustainable in the medium term with higher GKL earnings to be recognized starting 2H16 post consolidation of remaining 49% stake in the asset.

Risks

  • Premature contract termination on LNG and Offshore contracts.
  • Further unexpected deterioration of tanker market Forecasts
  • Unchanged.

Rating

  • BUY
  • Recent weakness in Petroleum rates and negative impact from temporary suspension of Yemen LNG have already been priced in. We believe earnings have bottomed out and will recover from 2H16 as (i) more LNG contracts (5 new vessels) start kicking in with resumption of Yemen LNG contracts, and (ii) higher contribution from Offshore (GKL) and Petroleum post consolidation of remaining stakes in its respective businesses.

Valuation

  • We maintain our SoP-driven TP at RM9.50 and BUY call on the stock.

Source: Hong Leong Investment Bank Research - 05 October 2016

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