• Keep BUY, new MYR9.27 TP (SOP) from MYR9.31, 17% upside and c.5% FY24F yield. 9M24 results missed our expectations due to softness in the gas segment. The group also announced a proposed share-based merger with Bumi Armada (BAB MK, BUY, TP: MYR0.70). Though still in preliminary stages, pending due diligence, we are encouraged by the share-based structure, which avoids straining cash reserves and should maintain MISC’s capacity to pay dividends over the long term.

• Missed expectations. 9M24 core earnings of MYR1.5bn (+4% YoY) came in at 64% and 63% of our and Street forecasts, with the negative deviation primarily due to weaker gas and offshore results. A third DPS of 8 sen (3Q23: 7 sen, 2Q24: 10 sen) was declared, in line with expectations.

• Results review. MISC booked a 3Q24 core profit of MYR376m (-32.6% QoQ, -27.7% YoY) post adjustments for impairments and additional Mero 3 opex. The QoQ decline was mainly on softer performances in the LNG segment, impacted by lower spot rates and spot vessel utilisation. The offshore unit also faced pressure on interest expense exposure, which offset minimal earnings, as the Mero 3 project nears the final stages of construction. The slightly better 9M24 core earnings of MYR1.5bn was mainly supported by improvements in the heavy engineering (HE) and petroleum segments, which helped counterbalance weaker performances in the offshore and LNG units.

• Outlook. Mero 3 delivered first oil on 30 Oct and received final acceptance from Petrobras on 2 Nov. The group is working on securing its standby rates, as the delay stemmed from technical issues on the part of Petrobras’ subcontractor. Moving forward, Mero 3 is anticipated to provide steady longterm cash flow for MISC. For vessel deliveries, the group expects four, 11, and two new LNG carriers to be delivered in FY25, FY26, and FY27, while the term-to-spot ratio is 85:15 for the gas division and 90:10 for the petroleum wing. However, MISC anticipates continued softness in spot charter rates in the coming quarters, driven by high gas inventory levels.

• Proposed merger. Recall: MISC has stated its intent to monetise the Mero 3 asset. This move takes priority before it pursues other large-scale FPSO projects, which are expected to be undertaken via strategic partnerships. MISC views the merger with BAB as well aligned with these objectives.

• We tweak down our FY24F earnings by 8%, given the soft gas outlook. Our SOP-based TP is lowered slightly to MYR9.27 after changes in our net debt assumptions offset the higher HE division’s valuation. TP is inclusive of a 4% ESG discount imputed, based on the stock’s revised ESG score of 2.8 and the 3.0 country median. MISC’s balance sheet remains solid, with its net gearing still at 0.25x. Downside risks: Higher vessel operating costs, contract terminations, and regulatory issues.

Source: RHB Securities Research - 15 Nov 2024