Critical to watch 2Q22F results
- MISC 2Q22 results on 18 Aug 2022 is very important as it may offer critical insights on whether strong tanker spot rates are finally benefitting MISC.
- We also expect a reversal of construction profits on the FPSO Mero-3 project as well as guidance on the revised capex budget for the project.
- Reiterate Add and SOP-based TP of RM8; both of the above developments could put a floor on the near-term uncertainty and help the share price rerate.
Investors need proof that strong aframax rates can benefit AET
Crude tanker spot freight rates for the small aframax tankers have jumped since the Russia-Ukraine war started on 24 Feb 2022. Therefore, when MISC released its 1Q22 results in May 2022, investors were disappointed that its tanker arm, AET, merely broke even (vs. a small pretax profit in 4Q21). In our view, this was because there is usually a time lag for AET to benefit from stronger aframax rates, while AET probably incurred losses on its spot VLCC fleet that was exposed to negative TCE rates due to vessel oversupply. When MISC releases its 2Q22F results, we would be looking for evidence that the strong aframax rates will be able to overcome the drag from the VLCC side. This will be the key for investors to gain confidence in MISC as an investment story, in our view. So far in 3Q22F, we highlight that the aframax and suezmax rates have strengthened significantly qoq, and even VLCC rates have been restored to positive levels as China’s crude oil demand has likely rebounded with the relaxation of pandemic lockdowns. While this is directionally positive for AET, investors still need confirmation from the 2Q22F results and MISC’s guidance at the analyst briefing.
FPSO Mero-3 profit reversals and capex budget need to be clarified
MISC is facing cost overruns in its FPSO Mero-3 construction project and execution delays. The DCF value of the FPSO Mero-3 project to MISC’s SOP was reduced by 25% from RM0.84/share to RM0.63/share in our 27 May note, as we pencilled-in higher project capex of US$2.2bn, from US$1.8bn previously, due to project execution delays and cost overruns. On 29 and 30 Jun 2022, MISC’s President/Group CEO Datuk Yee Yang Chien cautioned investors and analysts about the potential in 2Q22F for a writeback of earlier-recognised FPSO Mero-3 construction profits (see our 1 Jul note). If MISC provides realistic guidance about the FPSO Mero-3 project capex at the 2Q22F results release, the stock price can reflect that guidance and hopefully find a floor.
It’s all up to how MISC guides the market
MISC’s share price fell from RM7.10 on 30 Jun to a recent low of RM6.54 on 13 Jul in the wake of MISC’s disclosures about the Mero-3 project, and while the stock recovered to RM7.25, it is still below the recent high of RM7.84 on 5 May. The 2Q22F results may be a catalyst for a further rerating if AET finally delivers solid profits, and if MISC makes the necessary provisions and write-offs to properly reflect Mero-3’s project risks. However, if MISC fails to do so, the downside risk is for ongoing uncertainty to limit price upside.
