MISC’s adjudication win unlikely to materially affect earnings forecasts

KUCHING: MISC Bhd’s ( MISC) recent adjudication win is unlikely to materially affect earnings forecasts, Affin Hwang Investment Bank Bhd (AffinHwang Capital) says.

AffinHwang Capital recapped that MISC filed for adjudication back in September 2016 to seek resolution on a contractual dispute covering claims for outstanding additional lease rates, payment for completed variation work and other associated costs relating to the construction and leasing of GKL FPSO, which was governed by the lease agreement entered into in 2012 with Sabah Shell Petroleum Company (SSPC).

The research firm gathered that the dispute was purely on a disagreement over commercial terms, and has not jeopardised the existing relationship between MISC and SSPC.

“To recap, SSPC is the lessor of GKL, and had made good on its lease payment obligations to MISC for the lease of GKL despite the ongoing dispute,” the research firm said.

According to AffinHwang Capital, the award sum will be spread over the next 22 years until 2039 in accordance with the lease terms.

The research firm also gathered that MISC has been providing for one-third of the adjudicated sum in its finance lease payable calculations, and as such the remaining two-thirds of the lease payment will be adjusted proportionately over the lease term.

AffinHwang Capital noted that this would result in immediate higher lease payments payable by SSPC and hence a higher earnings contribution by GKL to MISC’s bottomline.

“There should also be a one-off fair value adjustment arising from the adjudication, given that GKL is being capitalised as finance lease receivables on the balance sheet, but management is still finalising the impact assessment with its auditor.

“Nonetheless, this adjudication win is unlikely to materially affect our earnings forecasts, given the long gestation period and the fact that GKL is a small earnings contributor relative to other core segments,” the research firm said.

Overall, A ff in H wang Capital maintained its ‘ sell’ recommendation and sum of the parts-based target price of RM6.30 per share.

The research firm also said that lingering worries on tanker oversupply in 2017 could tilt the petroleum tanker segment back to losses, while lower term-to-spot charter ratios in the liquefied natural gas (LNG) segment could expose MISC to multi- year low freight rates, likely a significant earnings drag.