MISC has entered into an FPSO swap deal with SBM Holdings Inc.S.A. (SBM), through which it will dispose of its 49% stake in FPSO Espirito Santo (Brazil) to SBM in exchange for the remaining 49% stake in FPSO Kikeh (Malaysia), the first and largest deepwater FPSO in Malaysia. The deal is expected to bring a slight PAT accretion of RM37.2m based on our projections, and the impact on the SoP-valuation is immaterial, but will reduce MISC’s exposure to aging Brazilian asset. We increase our FY25F forecast slightly, but maintain TP of RM8.09 and our MARKET PERFORM call.

MISC announced that its subsidiaries had, on 6 September 2024, entered into Share Sale and Purchase Agreements (SPA) with SBM to facilitate the acquisition of SBM’s 49% equity interest in FPSO Kikeh and the divestment of MISC’s 49% equity interest in FPSO Espirito Santo through the following transactions:

1. Acquisition of SBM’s 49% equity interest in Malaysian Deepwater Floating Terminal (Kikeh) Limited (MDFT) and Malaysian Deepwater Production Contractors Sdn. Bhd. (MDPC) by MISC OBU One (L) Pte. Ltd. (“MISC OBU One”), a wholly-owned indirect subsidiary of MISC.
    
2. Divestment by MISC of its 49% equity interest in Brazilian Deepwater Production B.V. (BDPBV), Brazilian Deepwater Production Contractors Ltd. (BDPC), Brazilian Deepwater Production Ltd. (BDPL), and Brazilian Deepwater Floating Terminals Ltd (BDFT), which owns the stake in FPSO Espirito Santo, to SBM.

There will not be any cash transfers involved, as this is an asset swap deal. Based on our assumptions, the 49%-stake contribution of FPSO Kikeh will amount to RM147.6m, while FPSO Espirito Santo contributes approximately RM110.4m. This implies that the deal will add a modest RM37.2m in earnings accretion to the group. Both assets are considerably aged, with FPSO Kikeh at 17 years old and FPSO Espirito Santo at 16 years old. Therefore, we believe the deal will be largely neutral for MISC, but it makes strategic sense as MISC refocuses on Malaysian assets (for future redeployments).

Forecasts. We lifted FY25F earnings slight by 1.6% after accounting for the net positive impact from the FPSO asset swap deal.

Valuations. We maintain our SoP-TP at RM8.09 as the change in SoP from the deal is expected to be insignificant. There is no change to our valuation based on ESG given a 4-star ESG rating as appraised by us (see Page 5).

Investment case. We like MISC for its: (i) exposure to the booming petroleum tanker market globally due to high demand for long voyages due to the Red Sea conflict, (ii) large recurring earnings base which provides the ability to pay consistent dividends (3.8% for FY25), and (iii) huge balance sheet which enables the group to bid for more capital intensive FPSO jobs. However, the incoming FPSO Mero 3 (accounting for 8% of our SoP-valuation) project’s execution risks remain high particularly when final acceptance is approaching in early 4QFY24. Maintain MARKET PERFORM

Risks to our call include: (i) lower-than-expected utilisation and spot rates for petroleum fleet, (ii) additional cost overruns and project delays for Mero-3, and (iii) further weakness in the global LNG shipping markets. (iv) risk of non-approval of the deal.

Source: Kenanga Research - 9 Sep 2024