• We are sanguine on MISC growth story leveraging on its expansion in the FPSO business. MISC is likely to secure a new FPSO project within the next 12-18 month amid the FPSO Mero 3 project that nears completion.

• Despite further production cut announced by OPEC+ effective 1Q24, we believe petroleum tanker supply constraint will sustain the tanker rate. This, coupled with lower loss at MMHE, will lead to stronger earnings in FY24.

• Maintain MISC as a BUY with unchanged TP of RM10.10 which implies 1.1x FY24 P/B and 17x FY24F P/E. As the stock price remains lagging to petroleum tanker rate (Chart 2), we think market will rerate the stock on sustains earnings momentum from the segment.

Offshore Segment to Steal Headline in 2024

We are optimistic with MISC’s growth trajectory leveraging on strong demand for FPSOs to cater for higher offshore O&G development capex spending. Note that its FPSO Mero 3 vessel that is worth c.USD2bn has reached 93% physical completion (as at 3Q23) and it is slated for delivery to Petrobras by mid of 2024. We expect it to commence its charter income the latest by 1Q25. The completion of the project will enable the company to undertake a new expansion project. Given tight supply condition and strong demand, a new FPSO project award may be on the horizon in 2024. We believe it is capable to undertake the project given its healthy balance sheet with low net gearing of 31% (3Q23).

OPEC+ Production Cut may not Enough to Offset Structural Supply Issue

We reiterate our view that tanker rate should remain elevated over the next 2-3 years. While OPEC+ production cut is seen as negative to tanker rate, we believe the impact of supply constraint should prevail. Note that tanker newbuild orderbook-to-total fleet ratio has fallen to a record-low of below 3%. The fleet supply is not likely to increase significantly over the coming years due to construction lead times as well as limited available yard capacity in Asia which are already fully occupied with new orders for container ships and LNG/gas carriers.

Earnings Growth in FY24F

We expect MISC’s earnings to grow by 8% YoY to RM2.6bn in FY24 owing to (i) elevated tanker rate (Chart 1) and (ii) turnaround in MMHE unit thanks to the completion of legacy projects. To recap, MISC EBIT was flattish at RM1.8bn in 9M23 as due to non-recurring expenses at MMHE and Offshore units.

Maintain BUY on MISC with TP of RM10.10 (Table 1)

We maintain our BUY call on MISC with unchanged SOP-derived TP of RM10.10. This implies 1.1x FY24 P/B and 17x FY24F P/E. We favour MISC due to (i) proxy for growth in frontier oil and gas development projects through FPSO projects, (ii) recurring income from its asset-leasing business model and (iii) above-market dividend yield of c.5%.

Source: BIMB Securities Research - 26 Jan 2024