KUALA LUMPUR, Sept 14 -- MISC Bhd will focus on project execution after winning a slew of contracts over the past year and be more selective in bidding for new work given the need to conserve equity capital for ongoing projects, according to a CGS-CIMB Research report.
MISC’s ongoing projects and recent contract awards with capital expenditure (capex) totalling US$4 billion include the Petrobras Letter of Intent for the 22.5-year floating production storage and offloading (FPSO) Mero 3 project, six very large ethane carriers (VLECs) for charter to Zhejiang Satellite Petrochemical and two liquified natural gas (LNG) vessels for charter to Diamond Gas.
Others are two LNG vessels for charter to ExxonMobil, six shuttle tanker contracts for charter to Shell and Petrobras in Brazil, and two very large crude carrier (VLCC) contracts for charter to Total SA.
CGS-CIMB noted that MISC president/group chief executive officer, Yee Yang Chien had revealed in a regular engagement session with analysts that MISC was focused on execution of its order book.
The report highlighted mainly the FSPO Mero-3 project and its impact.
The FSPO Mero-3 which MISC intends to ultimately retain only a 30-50 per cent stake in, will be the international shipping company’s largest commitment as it takes the entire construction risk on its shoulders.
“MISC said that it would divest equity stakes in the project once the construction is completed and the asset is deployed offshore, presumably after Petrobras signs off and gives official and final acceptance.
“The benefit of divesting at this stage is that MISC should be able to make a strong financial return from its efforts over the 40-month construction period,” the research house said.
Once construction risks are over and Petrobras has given final acceptance, CGS-CIMB said the project’s risks will decline significantly, allowing the project owner to divest partial stakes at significant gains.
“However, the downside of divesting at final commissioning is that the risks during the construction period are not shared with other partners. Cost overruns, late delivery, and liquidated damages, if any, will be borne entirely by MISC.
“For small projects, it may not matter greatly, but for large US$2 billion capex projects like Mero-3, it will definitely make a difference to the financial risks of MISC,” it said.
With the flurry of projects secured over the past one year, it said MISC was not in a position to secure any more new contracts, particularly with the steepest part of the ‘S-curve’ for the FPSO Mero-3 expected in 2022.
MISC is now entering into a very crucial period in its history – it must execute flawlessly the FPSO Mero-3 project, as it is taking all of the construction risk on its own shoulders, it said.
Upside risks for MISC include a recovery in tanker demand that may lift freight rates. Downside risks include the challenges it faced in executing the Mero-3 project.
The research house has lowered MISC’s sum of parts (SOP)-based target price to RM7.57 from RM7.97, reducing its charter rate assumptions for FPSO Mero-3 and the shuttle tanker newbuildings, partially offset by the inclusion of the valuation of the Mero-3 into the SOP.
It maintains its hold call on the group.
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