Analysts view the latest move by Petroliam Nasional Bhd (Petronas) to procure its liquefied natural gas (LNG) tankers directly rather than from MISC Bhd as disappointing and negatively impacting the sentiment surrounding the latter.
Yesterday, MISC shares fell 1.7% to RM5.20, with 4.74 million shares being done.
To recap, last week, Petronas had announced that it had decided to source its LNG vessels directly from shipbuilders, moving away from its practice of using its 63%-owned MISC as the main supplier of such vessels.
The national oil corporation said that this was part of its strategy to optimise the value of its LNG business requirements at the lowest price. However, it would engage MISC to provide project management and technical consultancy services for the construction of the new LNG ships.
Recall also that MISC has been struggling with challenges related to a combination of factors, including a global oversupply of vessels, which has driven tanker rates to rock-bottom levels and impacted MISC’s earnings.
StarBiz had reported last week that a possible rationale for Petronas’ change in strategy had its merit, given that MISC already had a stretched balance sheet.
Taking on new shipbuilding jobs estimated to cost between US$800mil (RM2.59bil) and US$1.8bil (RM5.82bil) would require it to gear up further, a prospect that it could ill-afford, said some quarters, as it had only returned to the black in financial year (FY) 2012 ended Dec 31. As at March 31, MISC’s total liabilities stood at RM13.5bil.
CIMB Research in a report said that the development was a negative surprise that threatened to reduce MISC’s LNG revenue by 20% over the next five years.
“From 2014-2018, contracts for seven LNG ships would expire. We think that five would be renewed at lower rates and two would not. If MISC had the benefit of eight new LNG shipping contracts, the shortfall would have been plugged and even allowing for some growth. But since this is no longer possible, we expect LNG division revenues and profits to start declining from 2014 onwards,” the firm said. It noted that in the first quarter of FY13, the LNG division contributed 87% of MISC’s earnings despite only accounting for 27% of group revenue
However, industry sources said that it would be likely that Petronas would have to rely on MISC to operate the vessels at a fee. “If that is the case, then MISC would still have a steady stream of income, albeit on a smaller scale. This would work well for the shipping company to slowly strengthen its balance sheet,” said a source.
MISC now had a leaner balance sheet, with a net debt to equity of 0.2 times in FY12 as opposed to 0.5 times previously, following the sale of its 50% in semi-floating production system Gumust Kakap to Petronas and the linear business. But these are only one-off sales proceeds and not from operations.
Hong Leong Investment Bank said the news was expected to negatively impact investor sentiment on MISC’s future positioning within Petronas besides future earnings potential
Meanwhile, some analysts have suggested that the decision by Petronas might be linked to a second privatisation attempt of MISC. “We believe that Petronas is attempting to lower investor expectations on MISC as well as potentially consolidating it back into the group in the future,” Hong Leong IB said. The firm raised the issue of the economic feasibility of having two identical LNG shipping subsidiaries, as this may involve higher overall costs with lower economies of scale.
Last week, RHB Research also said that Petronas’ strategy to expand its LNG fleet might signal another attempt to take MISC private.
In April, Petronas had unexpectedly failed in its bid to privatise its shipping arm at a revised offer of RM9.2bil, or RM5.50 per share, with acceptance from shareholders amounting to 86.07%. This was 3.93% short of the 90% shareholding level it had required to make the offer unconditional.
MISC’s share price hit a one-year high of RM5.85 on July 23, driven by investor expectations that the company’s earnings in the next three to five years would be boosted by the signing of eight new LNG shipping contracts with Petronas. With this assumption no longer valid and in the absence of any cyclical upside catalysts, CIMB Research believes that MISC’s share price should once again reflect a large discount to its underlying sum-of-parts (SOP) valuation. “Our target price of RM4.35 is based on an unchanged 30% to SOP (of RM6.20),” the firm said, maintaining its “underperform” call on MISC.