• Reiterate BUY, new MYR9.31 SOP-based TP (from MYR9.84), 17% upside, c.5% yield. We are generally positive on the two additional LNG carrier charter contracts secured by MISC, which should boost its recurring income base. However, to achieve decent project returns amid elevated asset prices, the charter rates will need to be significantly higher than current spot rates. While we are optimistic about its two charter contract extensions, we remain neutral on the early terminations as we await further clarification on the compensation to assess the overall impact.

• Contract wins. MISC secured 15-year long-term time charter contracts from Petronas LNG (PLSB) for two newbuild LNG carriers. These vessels, to be built by Samsung Heavy Industries, are expected to commence operations in 2027. While the contract wins are positive, as it will expand MISC’s fleet size and enhance its recurring income profile, we have some reservations on the potential returns, pending further disclosures by management. We note that the project IRR could be unexciting due to higher asset prices compared to previous contracts. Although the cost of building new vessels has fallen slightly to c.USD262.5m (-0.6% MoM), the daily charter rate (DCR) should be in the range of USD100,000-110,000/day to achieve a 7-8% IRR.

• Terminations and extensions. MISC announced the early time charter terminations for three vessels (Seri Ayu, Seri Angkasa, and Seri Begawan) scheduled for redelivery on the 20th anniversary of their charters in 2027/2028. MISC will receive compensation from PLSB for these early terminations, which may be based on the NPV of the remaining charter contracts, in our view. Meanwhile, Seri Alam and Seri Amanah will have their time charters extended until 31 Mar 2028, after their current contracts expire in 2025 and 2026.

• Earnings. Assuming each vessel costs USD260m, with 15-year firm tenure and USD110,000/day DCR, the IRR would be c.8%. At 7.5% WACC, we value the contracts at MYR0.02/share, and expect it to contribute MYR50m net profit (c.2% of FY25F earnings). As MISC’s balance sheet is solid, with net gearing at 0.3x in 2Q24, we believe it is capable of funding the equity portion of net capex estimated at USD156m, assuming 70% debt financing. For now, we slash earnings estimates by 3%, 10%, and 10% for FY24-26 to account for the stronger MYR. However, the early contract terminations have not been factored in, pending further details. Our lower TP of MYR9.31 is in line with a stronger MYR assumption and includes a 4% ESG discount. We continue to like the company for its steady operating cash flow, with anticipation of a bump-up from the start of the Mero 3 project.

• Downside risks: Higher vessel operating costs, contract termination, and regulatory risks.

Source: RHB Research - 2 Oct 2024