• FY23 core net profit of US$509m exceeded our forecast by 3.5%, on better- than-expected AET profits as freight rates were strong in 4Q23.

• Upgrade from Hold to Add, as the sail-away of the FPSO Mero-3 on 24 Feb 2024 raises market anticipation of a successful start-up by year-end.

• Meanwhile, tanker rates may sustain its strength through FY24F; we raise our end-CY24F SOP-based TP to RM8.24, on the back of these positives.

Stronger 4Q23 core net profit on better AET, MMHE and offshore

4Q23 core net profit of US$158m was 35% higher qoq because subsidiary AET delivered higher profits, on the back of a sequential increase in average tanker freight rates (Figs 16- 21), which was driven up by rising Chinese crude oil imports, greater volume of long-haul shipments from the Americas to Asia due to production cutbacks by Middle East producers, and the Red Sea shipping disruptions, which caused about half of tankers that would otherwise have used the Suez Canal to divert via the Cape of Good Hope (adding tonne miles in the process). Aframax crude tanker freight rates also benefitted from the migration of coated aframax tankers back to the product trades to benefit from very strong product tanker freight rates. MISC’s offshore profits in 4Q23 also rose qoq as the FPSO Mero-3 saw a surge of revenue recognition in the run-up to shipyard completion. Heavy engineering subsidiary MMHE saw its 3Q23 loss (due to provisions for foreseeable contract losses in its ongoing projects) turn around to a small profit in 4Q23. The above trends were partially offset by a qoq decline in LNG earnings as two vessels encountered mechanical difficulties, causing them to go off-hire and incur additional maintenance costs. MISC’s FY23F core net profit was slightly lower yoy, as LNG earnings declined from the expiries of several legacy contracts, coupled with losses at MMHE due to loss provisions, partly offset by higher AET profits from stronger crude tanker freight rates. MISC declared a full- year DPS of 36 sen (final DPS of 12 sen), in line with expectations.

Future Mero-3 startup, strong tanker rates are re-rating catalysts

Upgrade to Add, with the key re-rating catalysts being likely stronger petroleum tanker freight rates for 1Q24F, as well as the rest of the year, due to demand growth for oil amid very marginal tanker fleet growth. If MISC successfully commissions the FPSO Mero-3 and achieves first oil and final acceptance by end-FY23F, the market may also celebrate this major achievement. We have pencilled-in 1 Jan 2025F as the start of the 22.5-year firm charter period. MISC is also bidding for more contracts across the gas tanker, petroleum tanker, and offshore segments; a potential major win could catalyse the share price, in our view. We raise our SOP-based target price to RM8.24. Downside risks likely to be closely related to whether MISC encounters technical challenges and/or delays in achieving the final acceptance for the FPSO Mero-3 project. MMHE is continuing to execute three legacy upstream engineering projects, and additional provisions for foreseeable contract losses may yet be booked into FY24F. Aggressive OPEC+ supply curbs in the future could also curb petroleum tanker demand and cause freight rates to weaken.

Source: CGS-CIMB Research - 28 Feb 2024