MISC Bhd has benefited from the ongoing geopolitical conflicts, as they have resulted in higher demand for mid-sized tankers.
Amid the favourable environment, the energy-related maritime solutions and services provider will likely renegotiate for better rates and tenures.
According to UOB Kay Hian (UOBKH) Research, the stronger tanker rates cycle is yet to be priced in for MISC’s shares. As such, the counter provides substantial upside.
The brokerage retained its “buy” call for MISC, with unchanged sum-of-parts-based target price of RM8.60, implying 18 times the estimated price-earnings for the financial year ending Dec 31, 2023.
UOBKH Research revealed that its participation in a recent CEO sharing session with MISC confirmed its views that the company had benefited materially from the surge in mid-sized tanker demand.
“Management confirmed its mid-sized tankers benefitted from geopolitical tensions, by renegotiating for better rates and tenures,” the bokerage said in its recent repot.
“The Russia-Ukraine crisis sparked energy security demand and trade flows disruption,” it pointed out.
Citing Platts, UOBKH Research noted that the world needed an additional 50 Aframax and 25 Suezmax oil tankers to accommodate the trade flow shift, which had tightened tonnage, and subsequently led to high tanker rates.
In addition, Platts forecast tanker utilisation would remain higher for longer, as trade flow changes continued.
Separately, UOBKH Research noted MISC’s US$2.1bil (RM9.8bil) Brazil floating, production, offloading and storage (FPSO) Marechal Duque de Caxias (Mero-3) project had reached 90% completion in the Yantai yard in China.
“We continue to believe it is on track to deliver the FPSO by May 2024. It will also mean a ramp-up of MISC’s staff force in Brazil,” it said.
“Relatedly, its yard subsidiary Malaysia Marine and Heavy Engineering Holdings Bhd looks set to be busy, but they have to have solid project management,” it added.
UOBKHResearch said it continued to exect MISC to see resilient strength in petroleum earnings, which should more than offset the expected decline in liquefied natural gas (LNG) earnings next year.
The brokerage said it expected MISC’s LNG earnings base decline to see a marginal decline in 2024, before rising again in 2025.
“MISC should enjoy a step-up in 2025 cash flow and earnings from Mero-3’s new contribution, at US$100mil (RM466.6mil) on gross basis although MISC intends to divest 50% stake,” UOBKH Research said.
“This implies MISC is expecting 2025 earnings before interest, tax, depreciation and amortisation (ebitda) to be as high as US$1.2bil (RM5.6bil), consistent with our RM5bil forecast,” it added.
In justifying the high valuation it ascribed for MISC’s shares, UOBKH Research explained: “We believe MISC deserves to trade at the top end of its historical trading range, due to its strong ebitda from the upcycle in petroleum earnings, as well as the step-up in long-term earnings basefrom Mero-3 (to compensate for th cyclical nature of tankers).”
UOBKH Research said its net debt and ebitda forecast of 2.7 times implied MISC still had room to secure new contract wins.
Meanwhile, the brokerage said MISC would likely ramp up certain energy transition investments amid the growing focus on the environment, social and governance principles.
Among the transition projects MISC was considering included liquid carbon carriers, dual-fuel technology for fleet replacement and green ammonia vessels.
Source: The Star
