Potential New Contract Bids Fairly Priced In
Consistent with management’s guidance on relooking at bid funnels for 2022, we think MISC has a higher chance to secure new FPSOs, as other peers like Yinson have their hands full with existing projects. Another promising segment is the niche shuttle tanker space. Higher contract win potential may offset persistently weak tanker sentiment, at least in 1H22. Nevertheless, these are all priced in and reflected in +1SD trading PE band. Maintain HOLD with target price of RM6.75.
WHAT’S NEW
• Returning to the project bidding market, especially FPSO (offshore). According to Rystad Energy, the floating production, storage and offloading (FPSO) market was very strong with 10 new awards in 2021, vs three yoy. This is likely to continue apace in 2022 with 10 more new awards expected. MISC guided to bid for new FPSOs (capex: US$1-2b) around the Atlantic basin, as FPSO Mero-3 should have passed peak construction stages. Assuming 50% stake, a new Brazil FPSO may be similar to Mero-3 at RM0.40/share. MISC was cited by Upstream to be bidding for the Cameia FPSO (Angola) along with peers like Yinson and Bumi Armada. The total may fast track the award by 1H22. With the scarcity of reliable FPSO contractors available, especially since Yinson is full with three Brazil jobs at hand and Bumi Armada remains relatively highly geared on balance sheet, we see MISC standing a good chance to secure another FPSO project.
• Shuttle tankers also set to grow along with Brazil production. Rystad also forecasted that demand for shuttle tankers may rise by 35% from 2.5b in 2021 to 3.3b by 2030. The rise in demand is further compounded that shuttle tankers are specialised tankers crucial for moving liquids in locations of extreme offshore conditions or when subsea pipelines are unviable. Shuttle tankers utilisation in Brazil saw activity soaring by 55% from 605m barrels in 2013 to 1.07b in 2021. This is forecasted to hit 1.84b barrels in 2030. Norway and the UK are also significant markets for the niche segment, with 763m barrels and 312m barrels handled respectively in 2021. MISC has recently delivered one Dynamic Positioning Shuttle Tanker (DPST) for Brazil, bringing up its DPST fleet to 12 (over total shipping fleet of 100 excluding offshore segment), and will deliver five more this year.
• Potential for contract wins offsets tanker sentiment sailing into 2022 headwinds. To recap, the tanker freight markets did not fulfil expectations of a historically strong quarter back in 4Q21. For Very Large Crude Carriers, spot daily rates were last heard at US$18,000-25,000, while daily opex remained high at US$22,000-25,000 in the industry (partly due to higher bunker costs). Given a historically weaker 1Q vs 4Q, the market may experience an oil surplus in the start of 2022. However, unrests in Kazakhstan and Libya, as well as delays in the Iranian sanction deal, may complicate the timing of tanker rates recovery.
EARNINGS REVISION/RISK
• Retain forecasts except for a 4% cut in 2022 earnings. Premised on latest consultants’ view on slower tanker recovery for 1H22 horizon, we assume a wider 2022 petroleum EBIT loss from RM37m to RM99m. As of last week, spot tanker rates remain fairly lacklustre.
VALUATION/RECOMMENDATION
• Maintain HOLD, with new target price of RM6.75 (from RM6.70), implying 20x 2022F PE (at +1SD of five-year average PE band). Although we cut LNG DCF from RM3.70 on the back of rising discount rates, we raise new contract win potential from RM0.70. Overall and despite the rising interest rate environment, EBITDA and dividends remain fairly stable, with potential longer term growth if new projects are secured. Investors can consider an entry price of RM5.85 (17x PE), which excludes potential new contracts and implies a more palatable dividend yield of 5%. Having said that, >40% of MISC’s fleet may approach 15 years old by the effective date of 2023-24 of tougher decarbonisation regulations, which may prompt a new reinvestment cycle ie more vessel sales to be replaced by eco-friendly vessels.