MIDF Research has revised its target price (TP) for MISC as its earning is now back to black. In its research report, it has also raised the main point that MISC reversed its previous losses with profit surging by over 100% on-year and on-quarter to RM820.6m in 3QFY22, from RM401m in 3QFY21 and from a loss of – RM19.1m in 2QFY22.
For the cumulative 9 months, earnings dropped by -14% yoy to RM1.18b. Consequently, MISC’s earnings came in above the research house’s expectation at 97% of full-year estimate. The higher earnings were due to one-off compensation for a contract renegotiation and the gain from the construction of an FPSO.
Revenue up +34% yoy. The group reported a rise in revenue by +34.3%yoy and +12.5%qoq to RM3.61 billion. For the cumulative 9 months, revenue increased by +27.8% to RM9.69b. This is contributed by: (i) higher freight rates for mid-sized tankers, (ii) higher earning days for its Petroleum & Product Shipping (PPS) and Gas Asset & Solutions (GAS) segments, and (iii) higher recognition of construction revenue of an FPSO.
Gas Asset and Solutions. This segment’s revenue rose by +6.6% yoy and +3.6% qoq to RM790.1 million, while profit shot up +13.2% yoy and +7.6% qoq to RM355.1 million. Cumulatively for 9 months, both revenue and earnings are up by +9.1% yoy to RM2.31 billion and +18.5% yoy to RM1.08 billion respectively.
Petroleum & Product Shipping. For the cumulative 9 months, revenue and earnings increased by +39.3%yoy to RM3.28b and +159.6% to RM618m.
Offshore Business. This segment recorded a gain in revenue by +49.4% yoy and +25.8% qoq to RM1.12 billion. However, earnings slipped – 21.9% yoy to RM190-76.7%, but gained >100% qoq from a loss of – RM20.1 million. Cumulatively for 9 months, revenue increased by +38.1% yoy to RM2.78 billion while earnings lost -47.1% yoy to RM354.4 million.
Marine & Heavy Engineering. This segment reported a rise in revenue by +5.1% yoy and +2.1% qoq to RM409.2 million. Meanwhile, earnings surged >100% yoy to RM19 million from a deficit of -RM20.1 million in 3QFY21, but lost -26.4% qoq. For the cumulative 9 months, revenue and earnings gained +18.6% yoy to RM1.23 billion and +134.5% yoy to RM51.1 million respectively.
Robust orderbook. As of 3QFY22, MISC had completed repair & maintenance of 72 vessels of various categories including 8 LNGCs. Additionally, the group was awarded the provision of Front-End Engineering Design (FEED) Competition for the Kasawari Carbon Capture & Storage (CCS) project from PETRONAS Carigali, and a contract from Sarawak Shell Berhad (SSB) to undertake the Engineering, Procurement and Construction (EPC) of the offshore platform for the Rosmari-Marjoram gas project. The group’s orderbook backlog stood at RM2.2b, with approximately RM15-16b-worth of heavy engineering tenders submitted. 2 LNGCs is expected to be completed in 1HCY23, as well as 1 VLCC in 1HCY23 and 2 VLCCs in 4QCY23.
Demand in LNGC surged. Due to increased demand for LNG cargoes as winter approaches and Europe accelerates its FSRU-based LNG import projects, LNGC spot rates increased by 46% qoq in 3QFY22. This had a dampening effect on Asian LNG import and power generation projects. The push for energy security, the rising LNG demand, and the shortage of LNG supply in advance of the winter season all contributed to an increase in time charter prices. As a result, a rise in new orders is anticipated throughout the year, led by the LNGC orders from Qatar and the soaring demand from Europe, which saw 124 vessels ordered in 3QFY22.
Cautious outlook on shipping market. The increase in the FID of planned liquefaction projects and growing demand for LNG are expected to be positive catalysts to MISC’s shipping business. VLCC earnings is expected to rebound due to the increase in US crude flows to the Far East and South Asia.
The uptrend continues in mid-size tanker spot rates due to reshuffling of trade routes prompted by EU’s ban on Russian imports and the greater tonne-mile growth caused by the Russia-Ukraine conflict. Oil supply continues to be tight this winter, capping any rise in freight rates.
The risks to the demand outlook remain to be the disruption in Chinese oil demand and the global economy slowdown. The tanker market orderbook trend remained low due to: (i) high newbuilding prices, (ii) lack of yard space, (iii) prevailing tonnage oversupply, and (iv) uncertainty over decarbonisation targets. Overall scrapping activities remains low despite some slight pickup in the midsize tanker segment.
Offshore activities to recover. Global offshore E&P capex spending is expected to reach USD131 billion this year – an increase of 18% from CY21, with Latin America and Asia Pacific accounting for nearly half of the total. New FPSO projects over the in the near to mid-term are expected to be mostly centered around South America, particularly in Brazil and Guyana.
Revised FY23-24 earnings estimates. With the resiliency in the market and taking MISC’s 3QFY22 earnings into account, MIDF has revised its FY23 and FY24 earnings projection upward by +31% and +23% respectively. As such, target price is revised to RM7.70 (previously RM7.48), by pegging a PER of 21x to a revised EPS23 of 37sen. The PER is based on a 10- year average PER for marine and tankers subsectors.
The research house has retained its NEUTRAL with TP at RM7.70. As global oil demand and supply continue to recover, the research house has stated it remains cautious on MISC’s future prospects, especially on the basis of freight rate hikes and weakening demand from China that could disrupt the timely execution of the group’s projects. Additionally, the volatile oil and gas market due to the ongoing Russia-Ukraine war, the upcoming Russian sanctions and tight crude supply remain to be major risks.
Despite the surge in earnings in 3QFY22, the research house recognises that it is likely a one-off event. Nevertheless, it reiterates its positive view for the group, on the basis of rising demand for both petroleum and LNG in Europe and East Asia; ongoing long-term contracts and resilient orderbook; and the bright prospects in the shipping and tanker market in the near term.
