This article first appeared in The Edge Malaysia Weekly on November 6, 2023 - November 12, 2023
CHANGE is in the air. Investors following MISC Bhd may have noticed the energy shipping giant taking an unconventional, and a somewhat aggressive, approach to its business of late.
In September, MISC announced that it had ventured into a sale and leaseback agreement of two of its liquefied natural gas (LNG) carriers to Nissen Kaiun Co Ltd, which would entail MISC transferring ownership of the vessels to the Japanese ship owner. The first vessel is to be transferred in the fourth quarter of this year.
Then, Nissen Kaiun inked a back-to-back agreement with MISC’s wholly-owned Eaglestar Marine Holdings (L) Pte Ltd and another company — Synergy Marine Pte Ltd — to provide ship management services for the two LNG tankers.
MISC has never made such moves in its 55-year history, which dates back to early November 1968.
Its president and group CEO Captain Rajalingam Subramaniam, 58, says the change in tack came about after a year-long total portfolio review of all the company’s businesses.
“[It involved] all our portfolios in terms of the strategic logic, the existential challenges that we have as an industry — the transitional challenges that we have, mapping for the future; that means, how do we bring ambition to action?” says Rajalingam, in his first media interview since assuming the helm of the shipping firm on Oct 1 last year. “It took a couple of iterations to our board of directors. And, finally, in March, this was approved. We have now progressed to the implementation of the execution stage … There will be some horizontal integration internally, some vertical integration that we need to do.”
Rajalingam, who has been with MISC and related companies for nearly 40 years, served as group chief operating officer since February last year before he assumed his new role, following the departure of Datuk Yee Yang Chien, who had been president and group CEO of MISC since 2015.
He says: “When you’re 55 years old as an organisation, there are good things that the organisation would have done to be able to be sustainable for that period. We also need to look at the next 50 years for the organisation. How do we do that? We map [our next steps based on] what our talent is, what the possibilities outside are, and how to match strategic logic and opportunities.”
The sale-and-leaseback type of deal with Nissen Kaiun is just one of the many initiatives MISC is likely to venture into under the review, dubbed the MISC 2030 business strategy.
What does the Nissen Kaiun deal entail?
“In a collaboration and partnership model, you don’t have to assume all the risks for your own balance sheet. We have to fortify our balance sheet [and] we need to ensure that we have a fortress balance sheet as an organisation. That will ensure financial stability,” Rajalingam says.
“The sale and leaseback is actually de-risking and unlocking our capital. You take the capital and put it into other revenue-generating [businesses], and what you’re taking is only an operational risk — not a capex [capital expenditure] risk. That’s how you unlock the capital.”
MISC has a few businesses under its belt, including owning a 66.5% stake in publicly traded oil and gas fabricator Malaysia Marine Heavy Engineering Holdings Bhd (MHB); MISC Maritime Services Sdn Bhd (MMS), which provides maritime services, marine assurance, port and terminal operations and management, among others; Eaglestar Marine Holdings (L) Pte Ltd, offering ship management; and Akademi Laut Malaysia (ALAM), which provides training for seafarers among others.
Shipping contributes about 83% of MISC’s bottom line, while the other large business, MHB, has seen better days (see “A tale of two companies with contrasting fortunes”).
On average, MISC’s annual capex is US$750 million (RM3.56 billion) to US$1 billion.
The basic business model involves MISC building vessels and chartering the ships out to oil majors, LNG producers, traders and others. Charter rates can vary, depending on the tenure of the charter period, with spot, or short-term, charter raking in more, while secure long-term charter periods are at lower rates but locked in for a longer period.
Unlocking value with potential AET spin-off
Among the findings of the March review was the need to integrate MMS and Eaglestar, while ALAM is being moulded into a university offering maritime studies for students from all over Asia. These two undertakings, however, are unlikely to excite.
More interestingly, Rajalingam does not discount the possibility of MISC’s wholly-owned petroleum tanker arm, AET, being floated on the stock market in an initial public offering.
“We are definitely looking at [the AET spin-off via an IPO]. We will look at all opportunities. We have not been open to the market about it but, you know, as management we have to evaluate all our portfolios,” he says.
In 2003, MISC acquired AET (then known as American Eagle Tankers Ltd) for US$445 million from Singapore’s Neptune Orient Lines (NOL). Since then, AET has grown by leaps and bounds.
“AET’s balance sheet is US$4 billion, and US$2.2 billion of the assets are new vessels,” Rajalingam says.
AET contributes about 40% to MISC’s bottom line and almost 30% of the shipping group’s total asset base of RM66.12 billion.
With Petroliam Nasional Bhd (Petronas) holding a 51% stake in MISC, it is no wonder that the national oil and gas company is a large client.
Declining to disclose the percentage of MISC’s charter contracts from Petronas, Rajalingam says: “You will see from our financials that [Petronas contracts are] still a large part, but they are not as large as what they were in the past. Petronas also has to do things in a very commercially arms-length manner; they have to maximise value as well.
“To me, Petronas is both the shareholder and a platinum client. But as far as being given things on a silver or gold platter, I beg to differ. Our gas portfolio, for example, [we have] contracts from Petronas, ExxonMobil, Qatar Energy. Our petroleum business is actually very small in terms of portfolio coming in from Petronas, because it is a highly commoditised transport model.
“Then, if you look at our offshore, yes, at the initial stages of our offshore business there were certain first right of refusals being given during the incubation stage, but now it’s gone purely commercial in terms of the evaluation.”
MISC’s annual report for the financial year ended Dec 31, 2022 (FY2022), shows that Petronas-related companies — Petronas LNG Sdn Bhd, Malaysia LNG Sdn Bhd and Petronas Carigali Sdn Bhd — accounted for RM2.81 billion, or about 20%, of MISC’s revenue of RM13.87 billion in FY2022.
Other large clients such as Petróleo Brasileiro SA (Petrobras), Royal Dutch Shell plc, Sabah Shell Petroleum Co Ltd, Equinor ASA, PBF Energy Inc, Satellite Chemical Co Ltd, Total SE, Marine Well Containment Co, Tanker International Ltd and China Petroleum & Chemical Corp (Sinopec) contributed RM7.28 billion, or about 52.5%, of FY2022 revenue.
Petrobras, which contributed RM4.37 billion to revenue, seems to be the largest contributor with 31.5% (see table next page).
Nevertheless, MISC has done well.
Strong balance sheet
For its six months ended June 30, 2023 (1HFY2023), MISC chalked up a net profit of RM1.06 billion on revenue of RM6.63 billion. For the corresponding period a year ago, the group recorded a net profit of RM357.3 million, from RM6.08 billion in revenue.
As at end-June, MISC had cash, deposits and bank balances of RM7.66 billion; on the other side of the balance sheet, it had long-term debt commitments of RM16.23 billion and short-term borrowings of RM1.93 billion. For the period in review, MISC had reserves of RM11.84 billion and retained profits of RM19.2 billion.
Net cash generated from operating activities was RM3.28 billion.
MISC’s dividend payments have been an attraction. At its close of RM7.30 last Friday, the company had a market capitalisation of RM32.58 billion and dividend yield of 4.93%.
Rajalingam says: “Though we don’t have a dividend policy — a regular dividend is 33 sen a year — we can have additional dividends because our cash position is good. Annually, we give more than RM1 billion in terms of dividends, about RM12 billion over the last 10 years — stable and steady, adding more and adding value.”
MISC operates a fleet of 107 vessels, but Rajalingam’s aspiration is for the group to own a fleet of 150 vessels, which means a 40% increase in vessel count is on the cards. According to MISC’s website, the company has 117 ships — 68 petroleum tankers, 31 LNG carriers, 12 floating storage and offloading (FSO) and floating production, storage and offloading (FPSO) assets and six ethane carriers — but these include chartered ships and seven newbuilds as well.
He does not rule out the possibility of merger and acquisition (M&A) opportunities to grow MISC’s fleet, but is guarded on the prospects of one actually happening.
“There are some proposals [on the table and] there are some prospects; we have to evaluate them. The one thing that you don’t want to do is M&A just for the sake of doing M&A at a price premium that is too high.
“The opportunities are there; my problem currently is [shipbuilding]. Yard spaces are quite full until 2026. So, new deliveries are going to be beyond 2026, [which is] two to three years away. We have to start now. My team is prospecting for new tenders; we are talking about a growth trajectory overall … We have to evaluate and make the decisions for the right reason,” he says.
Other than a larger fleet of ships, MISC is also evaluating acquiring new vessels in a consortium and locking in lucrative charters on the spot market. This would change the group’s current conservative mix of 80% of its vessels being on long-term charter against 20% being involved in the more lucrative but risky spot market, as well as alter the traditional model of buying vessels with locked-in charter contracts.
“MISC’s balance sheet is strong; we can afford to take some risks. This is something that we are evaluating instead of taking the risk directly — combine with some partners without taking too many undue risks,” Rajalingam says.
MISC’s bet on long-term charter as opposed to the more lucrative spot market may have paid off, however, as the Baltic Clean Tanker Index, which tracks the cost of carrying refined petroleum products, shed more than 64% of its value — from 2,143 points last December to 768 points at the time of writing.
The Baltic Dirty Tanker Index, which is used to chart the cost of carriage of crude oil by sea, was at 2,496 points in November last year, but had slipped more than 40% to current levels at 1,462 points.
On the seemingly good move to have 80% of MISC’s vessels on long-term charter, Rajalingam says: “At the end of the day, luck also plays a part, like in everything else in life, right?”
A tale of two companies with contrasting fortunes
Energy shipping giant MISC Bhd controls 66.5% of Malaysia Marine and Heavy Engineering Holdings Bhd (MHB), but the two companies have had diverging fortunes. While MISC has been a favoured stock on Bursa Malaysia, MHB has had a chequered past since its initial public offering (IPO) in October 2010. The frequent change in leadership at the oil and gas (O&G) fabrication outfit, for one, has raised eyebrows and many questions.
MHB managing director Pandai Othman, 53, is leaving the post at the end of this month after completing his secondment. He will be replaced by Mohd Nazir Mohd Nor, 46, who is from national O&G company Petroliam Nasional Bhd (Petronas). Notably, Petronas has a 51% stake in MISC.
Mohd Nazir will be MHB’s fourth managing director in a span of eight years.
Pandai was appointed to helm MHB in October 2020, replacing Wan Mashitah Wan Abdullah Sani who came in to head the company in January 2017. Wan Mashitah took the reins from Datuk Abu Fitri Abdul Jalil, who joined MHB in March 2015. Abu Fitri was MHB’s second managing director after the company made its market debut. The first was Dominique de Soras, who served MHB as managing director and CEO from 2011 to 2015.
On the departure of Pandai, MISC president and group CEO Captain Rajalingam Subramaniam says, “You see, MHB is a focus area [for MISC]. There are governance protocols — code of corporate governance, listing requirements and so on, so we cannot get directly involved on a day-to-day [basis in the operations] of MHB.
“So, as a shareholder, [we do] what is best for the entity [MHB], what is best for the shareholders and stakeholders within MHB. We try to assist and support as best as possible, without intervening and contravening the code of corporate governance and listing requirements. We need to keep it at arm’s length,” he tells The Edge in an interview.
“But the challenges at MHB [that] are going on are not dissimilar with the challenges that other fabrication yards face — even in the region. At MHB, the sacrosanct is, we deliver on our commitments. Whatever is contractual that we have committed, we deliver on our commitments … I will not say more.”
MHB, whose mainstay is in engineering, procurement, construction, installation, hook-up and commissioning of O&G offshore structures, owns the largest O&G fabrication yard in Southeast Asia — a 496-acre yard in Pasir Gudang, Johor.
At end-June this year, the company’s order book stood at RM6.2 billion, which will keep it busy until 2025. It had a tender book of between RM5 billion and RM6 billion.
It is noteworthy that TechnipFMC plc, a US$9.5 billion (RM45 billion) company known for its O&G prowess, has an 8.5% stake in MHB, acquired prior to the latter’s flotation exercise.
Despite the strong shareholding, speculation is rife that there could be changes at MHB. But nothing has been confirmed so far, except for Pandai’s departure.
From a multi-year high of 77 sen in mid-February, MHB’s share price had shed more than 30% to close at 52.5 sen last Thursday, translating into a market capitalisation of RM840 million.
MHB has not performed financially as well. Of the past seven financial years, the company was in the red in five. The outlook for the financial year ending Dec 31, 2023 (FY2023) does not look promising either.
For 1HFY2023, MHB suffered a net loss of RM385.16 million on revenue of RM1.55 billion. In the previous corresponding period, it managed to chalk up a net profit of RM24.69 million on revenue of RM818.41 million.
At end-June, MHB had cash and bank balances of RM406.48 million. On the other side of its balance sheet, it had long-term debt commitments of RM280 million and short-term borrowings of RM37.2 million. The company had an accumulated loss of RM253.03 million and negative cash flow of RM302.3 million during the period in review.
In the notes accompanying its financial results, MHB says the bleeding was the result of “additional cost provisions recognised for ongoing heavy engineering projects”.
On its prospects, MHB says, “Oil prices are expected to remain high for the rest of the year in view of the continued demand from China, coupled with supply shortages resulting from Opec+ production cuts, which will likely increase capital spending beyond pre-pandemic levels. In addition, the increasing significance of environmental, social and governance (ESG) will create multiple business opportunities for the group in the renewable energy space.”
In a mid-August report after the release of MHB’s 1HFY2023 results, MIDF Research revised its call on the stock to “neutral” from “buy”, noting that the results were way below its yearly expectations and slashed its target price by more than 37% to 51 sen from 81 sen previously. The local research firm also changed its valuation methodology from price-earnings to price-to-book in view of MHB’s earnings volatility.
In an Aug 17 report, TA Securities lowered its target price for MHB to 51 sen from 62 sen previously, but upgraded the stock to “hold”, citing higher upside potential following the recent weakness in its share price.
Nevertheless, a silver lining for MHB could be its foray into ESG-related businesses. MISC’s Rajalingam says, “MHB is now constructing the world’s largest CCUS (carbon capture, utilisation and storage) project at the Kasawari [oilfield], which is going to be parked in Malaysian waters of Sarawak.”
For the Kasawari carbon capture and storage (CCS) project, MHB secured a contract from Petronas Carigali Sdn Bhd — the exploration arm of Petronas — to undertake engineering, procurement, construction, installation and commissioning services, as well as secured the front-end engineering design (FEED) contract early this year.
When completed, the Kasawari CCS facility will be the largest offshore CCS facility in the world, with the ability to capture up to 3.3 million tonnes of carbon dioxide per year. It will also be the world’s largest offshore platform fabricated to capture and store carbon. The facility is slated to commence operations by end-2025.
It remains to be seen how well Mohd Nazir will steer MHB and whether the company’s fortunes will mirror that of its parent company MISC with the new focus on ESG. These factors are likely to keep MHB in the spotlight.
Analysts see steady dividends, capital appreciation for ‘undervalued’ MISC
Analysts are bullish on MISC Bhd for at least the next three years as they see elevated crude tanker rates and rising demand for liquefied natural gas (LNG) carriers supporting the energy shipping company’s earnings growth.
Crude tanker rates have remained resilient throughout 2023 and should remain high, they say, citing a low order book for newbuilds globally, geopolitical risks causing a shift in energy security priorities, a recalibration of crude suppliers and higher tonne-mile demand.
Beyond 2023, emission reduction targets will impact the speed of affected tankers and further moderate tanker supply.
“As at Oct 27, spot tanker rates for all classes — very large crude carriers (VLCCs), Suezmax, Aframax and medium-range (MR) tankers — saw a huge surge from the previous week, rising between 20% and 50%, whereas the time charter rates for long-term contracts are now even higher than during the height of the Covid-19 pandemic in 2020,” an equity analyst with a bank-backed research house tells The Edge, citing data from a shipping market report by Allied QuantumSea SA.
Investors do not seem to have factored the bullish movement of crude tanker rates into MISC’s share price. The stock has remained relatively stable this year at between RM6.97 and RM7.56.
BIMB Securities Research analyst Azim Faris Ab Rahim argues that the stock price has yet to move in tandem with tanker rates, owing to the market’s expectation of normalisation of tanker rates amid an Opec+ production cut. He expects elevated tanker rates to prevail in the medium term.
“We expect elevated petroleum tanker rates throughout 2023 to 2025. Reasons include a low order book for newbuilds and higher tonne-mile demand,” Azim tells The Edge.
“MISC stock price is trading at an FY2023F PER (price-earnings ratio) of 13.5 times, which is slightly lower than its FBM KLCI peers. Given its earnings growth potential, we think this is not justified. Its new venture into a new energy segment … should improve its long-term earnings visibility. Thus, we think it deserves a higher PER.”
He adds that investors can expect a steady dividend yield of 4% to 5% and capital appreciation from investing in MISC.
UOB Kay Hian Research analyst Kong Ho Meng says MISC also stands to benefit from Qatar’s massive LNG fleet renewal programme, as the company is expected to be allocated more than two Qatari LNG newbuilds.
On top of that, another positive surprise is MISC’s first sale-and-leaseback agreement, for two undisclosed LNG vessels to Japanese shipowner Nissen Kaiun Co Ltd by the end of this year. Under the terms of the transaction, MISC will transfer ownership of the LNG carriers to Nissen Kaiun and the company will simultaneously enter into a charter agreement with MISC’s subsidiary Eaglestar Marine Holdings and Singapore-headquartered Synergy Marine Pte Ltd as the ship managers.
“Our channel checks revealed the Nissen Kaiun deal may … represent a trend whereby Japanese shipowners are now engaging sale-and-leaseback agreements [to take advantage of the weak yen], as newbuild orders are expensive. If this is true, it may apply to MISC’s other expiring LNG vessels,” Kong writes in a research report.
MISC announced last Tuesday that it had secured a time charter contract to lease a floating storage unit (FSU) to Pengerang LNG (Two) Sdn Bhd (PLNG2) for 20 years, with an expected operational date in 2025 and an estimated contract value of up to US$213.7 million (RM1.01 billion).
PLNG2 is 65%-owned by Petronas Gas Bhd, 25%-owned by Dialog Group Bhd and 10%-owned by the Johor state government, and operates an LNG regasification plant in Pengerang that supplies natural gas to a power plant.
To fulfil the contract, MISC will convert one of its existing unused LNG carriers — the 137,100 cu m Puteri Delima Satu — into an FSU. The vessel ended its 20-year charter to Petroliam Nasional Bhd (Petronas) in January 2023 and has been laid up since.
In a recent sector note, CGS-CIMB Research analyst Raymond Yap considers the new FSU contract value to be low, as the US$213.7 million estimated contract value implies a daily charter rate of just US$29,274, “which is a far cry from the now-expired 20-year LNG time charter rate of US$130,000 per day (in our estimate) and also lower than the US$50,000 per day that we had pencilled for an LNG vessel replacement contract”.
Yap adds: “Overall, we expect that the low FSU rate would not help inspire investors on MISC, since it has about seven high-rate legacy LNG time charters that will expire between now and end-2026. Also, the FSU will only begin contributing from 2025, which is at least 14 months away.”
In 1HFY2023 ended June 30, MISC’s net profit more than doubled to RM1.07 billion from RM357.3 million in 1HFY2022, while revenue rose 9.02% year on year to RM6.63 billion from RM6.08 billion. The company declared a second tax-exempt dividend of 10 sen per share, amounting to RM446.4 million.
According to Bloomberg, the consensus target price for MISC is RM8.21, suggesting an upside potential of 12.5% from its closing price of RM7.30 last Friday.
Of the 14 analysts covering the stock, 10 recommended “buy” and four “hold”. Noticeably, UOB Kay Hian Research and TA Securities have the highest target prices for MISC at RM8.80 and RM8.60 respectively.
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