We noticed that share price was sold down on Fri’s afternoon trading session before clawing back some gains. We attribute this to 2 factors (i) profit taking, since the sell down arising from the OPEC divorce back in March (c.+11.1%) and (ii) although an unconfirmed scenario, mosaic theory suggests that this could be due to a potential impairment risk arising from the GKL arbitration award. Note that MISC is schedule to release its 1Q20 earnings result on the 8th of May 2020. FY20 will see higher delivery of vessels on time charters (7 DPST) boosting the groups recurring income, whilst the disposal of the 7 chemical tankers will save c.USD20m/annum moving forward. Thus, we are keeping our earnings forecast and SOP-driven TP of RM8.26. Maintain BUY.

Share price swings. We noticed that MISC’s share price was sold down on Fri’s afternoon trading session before clawing back some gains towards the end of the trading session. We reckon this could be due to 2 factors, namely (i) profit taking, since the share price has performed admirably for a large cap (+11.1% since the sell down arising from the OPEC divorce back in Mar) and (ii) although an unconfirmed scenario, mosaic theory suggests that this could be due to a potential impairment risk arising from the GKL arbitration award. Note that MISC is schedule to release its 1Q20 earnings result on 8 May.

GKL background. Dwelling further on the possibility of point (ii), on the 10 Apr, MISC announced that the arbitral tribunal had issued its awards on the long standing dispute between GKL (100% owned by MISC) and SSPC (Sabah Shell Petroleum Company) on their long standing dispute, since 2012, with regards to the construction and lease of the Gumusut-Kakap Semi-Floating Production System for the purposes of the production of crude oil. The arbitral tribunal awarded SSPC a net amount of c.USD220m plus interest for defects, liquidation damages, costs and other claims.

Potential consequences. Assuming that the USD220m (c.RM960m at an exchange rate of 4.36) as per the 10 Apr announcement will culminate in a one off write down, we can expect reported 1Q20 earnings to turn negative (historically MISC does c.RM300m-RM500m core earnings a quarter). Nonetheless, assuming this event was to unfold, we highlight that MISC remains on strong operational footing and its cash flow generation unperturbed. As at FY19, MISC has a cash balance of RM7bn and a net gearing of 0.17x; a RM960m one off payment will imply a pro-forma net gearing of 0.20x.

Outlook. For the petroleum segment, VLCC charter rates remains at a sweet spot on the back of favourable tailwinds for the tanker market arising from the supply glut. As at FY19 the portfolio mix for its Petroleum division stands at 72:28 term to spot. We continue to expect heavy engineering segment to improve moving forward due to higher dry docking activities coupled with upgrading and retrofitting work for LNG and petroleum vessels with the implementation of IMO 2020.

Forecast. Unchanged pending upcoming results. In any case, should the abovementioned scenario pan out, this would be an EI and have little impact to core numbers.

Maintain BUY, TP: RM8.26. We maintain our earnings and SOP-driven TP of RM8.26. FY20 should see the delivery of 7 DPST (Shell and Equinor) which should boost the groups recurring income, whilst the disposal of the 7 chemical tankers will save c.USD20m/annum moving forward. MISC is a rare diamond in this global economic climate and is a relatively “MCO proof stock”, yielding 3.8%. Maintain BUY.

Source: Hong Leong Investment Bank Research - 27 Apr 2020