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MISC braves volatile energy market with contract wins
“MISC’S 9M22 results outperformed estimates due to higher tanker rates and sturdy numbers from its heavy engineering division.” RHB Research
SHIPPING giant MISC Bhd, which posted stellar profits in its latest quarter, is continuing to ride on high liquified natural gas (LNG) prices and shipping rates.
The company is also riding on the prospect of winning new jobs. Another big positive is the fact that MISC is upgrading its tankers to become more eco-friendly, which should raise its environmental, social and governance rating among investors.
For the third quarter ended Sept 30, 2022 (3Q22), MISC reported a net profit of Rm821mil, a 104.6% increase year-on-year (y-o-y).
The group declared a third interim dividend of seven sen per share in the quarter under review.
While all the operating segments of the group have recorded growth in earnings, the petroleum and product shipping segment took up the largest share.
Revenue from this segment saw a 63.1% surge y-o-y at Rm1.26bil, driven by higher mid-sized tanker rates and LNG earnings.
This is followed by MISC’S revenue from its offshore division, which posted a near 50% jump y-o-y due to improved revenue recognition from the conversion of a floating production, storage and offloading (FSPO) unit. The gas assets and solutions arm, on the other hand, reached a revenue of Rm790.1mil or almost 7% higher than in 3Q21, owing to translational impact from the weakening ringgit against the US dollar.
Increased dry-docking activities for the quarter propelled a 5.1% revenue growth in the marine and heavy engineering segment at Rm409.2mil.
All in all, MISC’S operating profit for 3Q22 came in at Rm1.03bil, up by 112.7% y-o-y, riding on one-off compensation for a contract renegotiation and higher tanker rates in the petroleum segment.
RHB Research says in its latest report that the group’s net profit for the nine-month period in financial year 2022 (9M22) of Rm1.3bil exceeded both its and consensus’ full-year projections at 84% and 85%, respectively.
“MISC’S 9M22 results outperformed estimates due to higher tanker rates and sturdy numbers from its heavy engineering division.
“Tanker rates are likely to stay intact in the near term and further cost provisions on Mero 3 could be limited.
“Furthermore, MISC, in our view, stands a chance to win more gas projects amid strong global LNG demand,” its says.
Year to date, MISC has secured several job wins across operating segments, which will support its margins in the quarters ahead.
In September, the group’s wholly owned subsidiary AET Tankers tied-up with PTT Public Co Ltd, Thailand’s national energy company, for the construction of two Aframax oil tankers to be powered by green ammonia.
The collaboration outlined that AET will choose a shipyard to build the vessels, with slated delivery dates in 4Q25 and 1Q26 to PTT, for long-term charters.
Moreover, under MISC’S gas assets and solutions division, the group was recently awarded time charter long-term charter contracts by Qatarenergy (QE) for five 174,000-cubic-metre newbuild LNG carriers, through a consortium with Nippon Yusen Kaisha, Kawasaki Kisen Kaisha and China LNG Shipping.
With each member entitled to an equal equity interest of 25% in each LNG carrier, Maybank Investment Bank (Maybank IB) Research says in a report that MISC’S capital expenditure (capex) is expected to reach Rm1.2bil, given that the newbuild price for all recent QE’S contracts is at Us$215mil (Rm961mil) each.
This is in addition to the seven long-term time charter contracts that were secured by MISC earlier in August from QE, through a consortium with the same members.
On this note, Maybank IB Research says the group is expected to set aside a capex of Rm1.7bil to finance this project.
All 12 vessels are expected to be employed by QE under long-term charters from 2025 onwards.
MISC, through its subsidiaries Polaris LNG Three Pte Ltd and Polaris LNG Four Pte Ltd, has signed two time charter parties back in September with Seariver Maritime LLC (SRM) for two newbuild LNG carriers. The vessels are to be chartered for 10 years by SRM.
Under the offshore business segment, the construction of the Mero 3 FSPO is still ongoing, with almost 60% completed as of 3Q22.
For now, Maybank IB Research says progress seems to be behind schedule with MISC facing rising operating costs. Expected to be delivered to Petrobras by 2024, a total capex of Us$1.1bil (Rm4.9bil) is being recognised.
Additionally, the group has secured extensions on charter periods for several FSPO and floating storage and offloading contracts, which ensures stable recurring revenue streams.
RHB Research maintained a “buy” call for MISC with a higher target price of RM8.10. It opines that the robust outlook of the gas asset market will buoy MISC’S earnings in the near term.
“The near-term outlook of the petroleum tanker market should be positive, with continued growth in global oil demand and supply.
“MISC believes the gas asset market is likely to stay robust, with another Us$750mil to Us$1bil (Rm3.4bil to Rm4.5bil) worth of job opportunities up for grabs next year,” it says.
The group also stands to benefit from the increased demand for LNG cargoes as Europe speeds up its floating storage and regassification unit-based LNG import projects, says MIDF Research.
“The push for energy security, the rising LNG demand and the shortage of LNG supply in advance of the winter season all contributed to an increase in time charter prices.
“As a result, a rise in new orders is anticipated throughout the year, led by the LNG carrier orders from Qatar and the soaring demand from Europe, which saw 124 vessels being ordered in 3Q22,” it says.
The Russia-ukraine war has left Europe with an energy crisis as many depended on Russia for coal, oil and natural gas.
As Russia has since cut supplies of energy to Europe, the latter is now on a buying spree for LNG to replenish stocks this year ahead of winter, as part of its diversification strategy.
Earlier this year, the European Union announced its plans to replace two-thirds of Russian gas imports by the end of the year, before breaking its dependence from Russia completely in 2027.
Between March and September this year, Europe and the United Kingdom have increased imports of LNG by 68% from other countries besides Russia.
However, Maybank IB Research, which had maintained a “hold” call for the stock since 2Q22, says while LNG charter rates are at an all-time high, MISC may not be able to benefit much as most of its existing carriers are on long-term contracts.
Citing Clarkson Research, Maybank IB Research says there may even be a decline in rates as LNG carrier capacity surpassed tonne-mile trade growth beginning from 2024.
“We also note that the construction of Mero 3 FPSO is behind schedule and operating costs for MISC is on the rise, posting downside risks to the group,” it says.
The Russia-ukraine war has left Europe with an energy crisis as many depended on Russia as the source for energy. LNG trades have reached unprecedented highs as countries scramble to buy any available LNG in the market to prepare for winter.
Another game changer for the group is the decision by the Organisation of the Petroleum Exporting Countries and allies (Opec+) on the supply of oil.
Last month, Opec+ announced cutbacks on oil production by two million barrels per day from November onwards, as it forecast that demand will be hampered by a looming global recession.
“The re-imposition of global economic lockdowns and abrupt changes in Opec+ policy could also result in near-term earnings volatility for MISC,” says Maybank IB Research.
MIDF Research, which maintained a “neutral” call on MISC with a higher target price of RM7.70, says oil supply will continue to be tight in the coming winter, which will cap any rise in freight rates.
“The risks to the demand outlook remain to be the disruption in Chinese oil demand and the global economic slowdown.
“The tanker market order book trend remained low due to high newbuilding prices, lack of yard space, prevailing tonnage oversupply and uncertainty over decarbonisation targets,” it says.
“MISC believes the gas asset market is likely to stay robust, with another Us$750mil to Us$1bil (Rm3.4bil to Rm4.5bil) worth of jobs.” RHB Research