ANALYSTS are mixed over the US$700 mil (RM3.04 bil) contract awarded by France’s Total to MISC Bhd to operate and own two liquefied natural gas (LNG) dual fuel very large crude carriers (VLCCs) which are expected to be delivered in 2022.
MIDF said the contract, which is expected to run for seven years, is likely to amount to US$700 mil based on previous contracts procured by the company. The two new-builds are scheduled to be delivered to MISC from the first quarter of 2022.
“In terms of contract value, we believe that the long term contract by Total for the two LNG dual fuel VLCCs should be at least US$700 mil given the large tonnage size of VLCCs (circa 300,00 DWT) compared to Suezmaxes (circa 125,000 to 180,000 DWT) and Aframaxes (circa 80,000 DWT),” said MIDF.
The research house expected earnings accretion to be around RM43 mil a year.
MIDF added that these two LNG dual-fuel VLCCs signify MISC’s effort in decarbonisation as the vessels will emit about 20% less carbon dioxide, 85% less nitrogen oxide and 99% less sulphur.
The research firm said it made no revision to its earnings forecast for the company in FY20 and FY21. Meanwhile, it slightly adjusted its earnings estimates for FY22 by +1.8% to RM2.2 bil (previously RM2.16 bil) to impute earnings accretion from the latest contract award.
MIDF has maintained its trading buy recommendation for the company with a target price of RM8.11. It said in the long run, MISC’s exposure to the time charter contracts will shield MISC from huge fluctuations seen in the spot market.
Valuations are expected to be higher if the potential job wins for the offshore segment in FY20 worth around US$4 bil which includes FPSO Mero 3 and FPSO Limbayong. It also favours MISC for its attractive dividend yield of 4.0%.
On the other hand, AmInvestment Research maintains its hold recommendation on MISC with an unchanged sum-of-parts-based fair value of RM7.80 per share, which implies an FY20 EV/EBITDA of 9x – its 3-year average and at a 40% premium to AP Moller Maersk.
“While we are mildly positive on this development (the new contract), our forecasts are unchanged for now given the rising risks that LNG charters may be cancelled notwithstanding the long-term duration of these contracts,” said AmInvestment Research.
The research firm said globally, 123 additional LNG carriers or 23% are expected to be added to the existing 536 vessels over the next 3 years.
A bright spot for MISC would be the higher petroleum VLCC rates due to Saudi Arabia securing additional storage capacity following the expiry of Opec quota restrictions while land-based storage facilities are reaching full utilisation amid an unprecedented drop in Covid-19-depressed consumption globally.
However, it does not expect any substantive near-term earnings impact as MISC has already secured long-term agreements with clients for its VLCC vessels.
Meanwhile, Affin Hwang said a weaker economic environment could unveil several risks, which prompts it to reaffirm its sell rating on MISC. It foresees lower LNG yields on the back of a downward revision of existing contractual terms or outright non-fulfilment of contracts.
In the event of a production cut, following a ceasefire between Saudi Arabia and Russia, tanker rates could weaken in 2H20 on the back of more favourable oil-market dynamics.
It maintains its sum-of-the-parts valuation based on a 12-month target price of RM6.20. The research firm said LNG force majeure and revision in contract pricing pose risks to MISC. The LNG segment (66% of 2019 core PBT) could pose some downside risks to earnings.
As at Dec 31, 2019, MISC owned 29 vessels which are mostly long-term contracted to Petronas.
In the near term, it does not expect MISC to benefit much from higher tanker rates as its portfolio mix is weighted towards term vs spot at 78:28. Moreover, all of its VLCC vessels are already committed to long-term contracts.
“The current share price does not reflect the risks as MISC is trading above its long-term mean PER and is not reflective of the growing downside risk especially for its LNG segment,” Affin Hwang said.
At 2.30 pm today, MISC shares were traded at RM7.62, up from 4 sen from yesterday’s close, with 2.87 mil shares changing hands. – April 8, 2020
