Petrobras contracts seen to provide MISC with recurring income

MISC Bhd
(Feb 6, RM8.25)
Maintain buy with an unchanged target price of RM9.21:MISC Bhd has secured three long-term DP2 Shuttle Tankers (DPST) charter contracts worth US$525.6 million (RM2.16 billion) from Petrobras. We are positive about the contract win, as it helps to generate recurring income to MISC, while strengthening its business relationship with Petrobras.

On Wednesday, MISC announced that its wholly-owned subsidiary, AET Tanker Holdings Sdn Bhd, has been awarded long-term time charter contracts to own and operate three newbuilding Suezmax DPST from Petrobras, for operations in Brazilian and international waters.

The estimated contract value is US$525.6 million, and the charter is expected to commence in 2022. A shuttle tanker is a vessel designed for oil transport from offshore oil fields, and is an alternative to pipelines.

We are positive about the contract win, as it helps to provide long-term quality secured income to MISC. Currently, MISC has four operating DPSTs, and the remaining 10 vessels will be coming online gradually.

Also, the new contracts will further strengthen its business relationship with Petrobras — since these three vessels will be in addition to the six DPSTs (four currently under construction) for Petrobras. The capital expenditure (capex) for each vessel is estimated at US$95 million to US$100 million, and these vessels are likely to be built by Korean shipyards.

The contract duration is not disclosed, but we believe that it should be similar to the four DPSTs previously awarded by Petrobras back in May 2018, estimated at 10 years. Each vessel would then fetch a charter rate of US$48,000 per day, which is 8% and 9% higher than the estimated daily charter rates for the previous win from Shell and Petrobras respectively.

However, this is still lower than the previously secured DPST charter rate of US$55,000 per day which will be operating in the North Sea due to lower specifications.

Assuming a net margin of 25%, these three vessels will contribute around RM54 million per annum (around 3% of financial year 2020 [FY20] earnings) starting from 2022.

We maintain our estimates as the total estimated capex of US$300 million is within our capex assumption of RM5 billion per annum for FY20 to FY21. Maiden earnings from these three vessels will start to contribute to group numbers from FY22 onwards.

Our call is premised on better tanker rates in 2020, strengthening operating cash flow, and continuous contract flows from major segments.

Downside risks to our call are lower-than-expected charter rates and higher-than-expected vessel operating costs. — RHB Research Institute, Feb 6