• Keep BUY and MYR8.12 TP, 14% upside with c.5% FY24F yield. Post our site visit, we believe MISC’s LNG carriers should deliver stable earnings, with the possibility of being traded on the spot or re-deployed following the expiry of their charters. MISC’s LNG outlook remains upbeat, and it will only build new vessels backed by firm contracts with decent project returns. We continue to like its steady operating cash flow, and anticipate a boost from the Mero 3 project from 2H24 onwards. The stock is trading at an undemanding 14x FY24F P/E (-1.5SD from its 5-year mean).

• Seri Alam site visit. Last week, MISC welcomed analysts to its Bintulu LNG complex to visit one of its LNG carriers, Seri Alam. This Malaysian-flagged vessel was built in 2005 by a Korean shipyard, and is on a 20-year term charter with Petronas LNG. It has four cargo tanks with a total capacity of 145,572 cu m. We boarded the vessel and toured the control room, engine room and deck, while its captain explained the LNG loading process which usually takes about 14 hours. Some of Seri Alam’s usual destinations are Japan, China, Korea Taiwan and Thailand.

• Outlook. MISC’s gas segment – which has 31 LNG carriers, two floating storage units or FSU and six very large ethane carriers or VLEC – is its largest earnings contributor, and accounted for 61% of total operating profit in 9M23. Recall that MISC currently owns and operates 31 LNG carriers, of which four are on spot charters while the remainder are on long-term charters. There will be three and five vessel charters expiring in 2024 and 2025. MISC will be considering various options including contract extension and re-deployment opportunities to trade the vessel on the spot, before scrapping these vessels. Its LNG outlook remains positive, and management believes that clients are willing to offer decent rates despite the elevated asset prices. Although there is a trend of relatively shorter-term charter periods of 10-15 years vs 20-25 years previously, MISC will only build new vessels backed by firm contracts with decent project returns.

• Energy Efficiency Existing Ship (EEXI) and carbon intensity indicator (CII) compliance status. At present, MISC’s gas segment is the biggest emitter of greenhouse gases within the group – it was behind 61% of the group’s total emissions in 2022. We were guided that most LNG carriers have been retrofitted to be compliant with International Maritime Organisation (IMO) regulations, in terms of EEXI and CII ratings. MISC is aiming to achieve a minimum "C" rating in CII.

• With no changes in our estimates, our SOP-based TP stays at MYR8.12. This includes an unchanged 4% ESG discount, as its ESG score of 2.8 is two notches below the country median. MISC’s 3Q23 DPS dropped QoQ to 7 sen from 10 sen DPS in 2Q23, but we believe it is still capable of paying a full year DPS of 36 sen (FY22: 33sen) in FY23-25F. Its balance sheet remains solid, with net gearing still at 0.29x as of 3Q23.

Source: RHB Research - 11 Dec 2023