• Reiterate BUY, new MYR9.35 TP (SOP) from MYR8.94, 13% upside and c.5% yield. 1Q24 results exceeded our expectations on better petroleum and heavy engineering (HE) contributions, with core earnings rising 11% YoY. The higher quarterly DPS of MYR0.08 announced (1Q23: MYR0.07) was a pleasant surprise. We continue to like MISC for its steady operating cash flow, with anticipation of a bump-up from Mero 3 starting in 2H24 and undemanding valuation of 14x FY24F P/E or -1.5SD from its 5-year mean.

• 1Q24 core profit of MYR647m (+11% YoY) exceeded our expectations but met Street’s at 28% and 27% of full-year estimates. A first DPS of MYR0.08 was declared (1Q23: MYR0.07), slightly higher than expected.

• Results review. MISC booked a core profit of MYR647m in 1Q24 (+11% YoY, -6% QoQ) after stripping off USD11m from Mero 3 construction gains, MYR11m impairment provisions, and MYR74m from ship disposal gains. The QoQ decrease was driven by the softer LNG & petroleum division due to seasonally weak demand and lower profits from the offshore segment. Slightly offsetting the decline was the better performance from the HE division. 1Q24 core profit increased by 11% YoY, primarily on improved results from the HE unit and further supported by the petroleum wing on the back of higher-earning days, which masked weaker contributions from the offshore and LNG units.

• Outlook. The Mero 3 project reached 94.2% physical completion as of 1Q24 (4Q23: 93.5%) and will proceed with hook-up and commissioning. The project is set to achieve first oil by end 3Q24, marking the start of its firm period. Notably, MISC is in talks with several parties regarding Mero 3’s monetisation. The group had also signed a contract with Petco Trading Labuan in April for the time charter of the world’s first two ammonia dual- fuel Aframax oil tankers, advancing its transition towards zero-emissions vessels or SEZs. MISC expects four, 11, and two new LNG carriers to be delivered in FY25, FY26, and FY27, while the term-to-spot ratio within the petroleum division increased slightly to 92:8 in 1Q24 from 88:12 in 4Q23. The overall tanker market outlook remains positive due to strong Atlantic exports. This is further supported by a continuous decrease in newbuild orderbook amidst high asset prices.

• We lift our FY24F-26F earnings by 9.3-10% for FY24-26 on stronger contributions from MISC’s HE and petroleum divisions. Our TP is lifted to MYR9.35, factoring in the higher petroleum valuation at 1.1x (from 0.9x) P/BV, in line with the strong market outlook, and incorporates a 4% ESG discount based on an unchanged 2.8 ESG score. We also lift FY24F DPS to MYR0.38 in view of the higher DPS declared for the quarter amidst stronger operating cash flows (FY23: MYR0.36). MISC’s balance sheet remains solid with net gearing still maintained at 0.26x. Higher vessel operating costs, contract terminations, and regulatory issues are downside risks.

Source: RHB Research - 31 May 2024