MISC’s Qatar Energy job win a positive

PETALING JAYA: MISC Bhd will likely put aside some US$780mil in terms of capital expenditure (capex) for vessel investments, having secured three 15-year time-charter contracts from Qatar Energy.

According to Kenanga Research, the potential capex for the three vessels is based on the latest market prices and capacity of 165,000 cubic m, similar to the ship capacity for its 2022 contract win from Qatar Energy.

The research house pointed out that the latest investment will increase MISC’s net gearing of 0.26 times as of end-December 2023 to 0.35 times, which is still very manageable.

“Assuming an 80:20 debt-to-equity ratio and a 75% earnings before interest, taxes, depreciation, and amortisation margin, the three new vessels will contribute RM75mil net profit annually, accounting for 4% of financial year ending Dec 31, 2024 (FY24) earnings,” Kenanga Research said.

The charter contracts, which will commence in 2026, are estimated to fetch a daily charter rate of US$120,000.

Kenanga Research has maintained its forecasts and “market perform” call but raised its target price for MISC by 2% to RM7.69 from RM7.51.

Meanwhile, RHB Research has reiterated its “buy” call on the counter with an unchanged target price of RM8.94.

The research house maintained its earnings estimates as it had already factored in similar contract wins. It still likes the company for its steady operating cash flow, with expectations of a boost from the Mero 3 project in Brazil in the second half of the year, and undemanding valuation of 14.8 times FY24 price-earnings ratio.

“We are generally positive on MISC’s three new liquefied natural gas (LNG) carrier charter contracts, which should increase its recurring income base. However, we think it has to lock in much stronger charter rates than the current spot rates in order to fetch decent project returns, given the elevated asset prices,” it said.

The research house added that MISC currently had 31 LNG carriers, as of end-FY23 (30 owned, one chartered-in) and another 14 new builds (including 12 25%-owned vessels to be chartered to Qatar Energy).

“While there is limited disclosure on the contract, we note that the project’s internal rate of return (IRR) could be rather unexciting, as asset prices are now more expensive compared to MISC’s previous contract win,” RHB Research highlighted.

It added that the cost of building a new vessel is currently around US$265mil, up 14% from the average cost in 2022.

“Assuming that capex is locked in at US$260mil, we estimate that the daily charter rate would need to be at US$90,000-US$110,000 per day to fetch a project IRR of 7%-10%,” the research house said.

It added that spot charter rates fell below US$50,000 per day at end-March, which is lower than the average one-year and three-year time-charter rates of US$65,000 per day and US$70,000 per day in January.

“At a 7.5% weighted average cost of capital, we value the contracts at three sen per share, with RM60mil net profit contribution. As MISC’s balance sheet is solid, with net gearing at 0.25 times in the fourth quarter of 2023, we believe it is capable of funding the equity portion of net capex estimated at US$234mil, assuming 70% debt financing,” the research house said.