The Mero-3 Project And LNG Vessel Deliveries Will Contribute To Future Sustainability In Maritime Services

Key Takeaways

• Strategic fleet rejuvenation and decarbonization efforts position MISC for future growth and improved sustainability-aligned revenue stability.
  
• Mero-3 project delivery and LNG vessel charters enhance long-term cash flow, supporting revenue and earnings growth.
  
• Declining financial performance, merger uncertainties, and high capex needs challenge MISC Berhad's revenue growth, cash flow, and shareholder value amidst geopolitical risks.

Catalysts

Provides energy-related maritime solutions and services worldwide.

• The successful delivery of the Mero-3 project and its subsequent operation commencement will contribute to a steady long-term cash flow, positively impacting future revenues and earnings.
  
• The anticipated delivery of newbuild LNG vessels under long-term charters starting in 2027 is expected to enhance the Gas segment's revenue and cash flow, as these modern, efficient vessels align with sustainability goals.
  
• The potential merger with Bumi Armada to create a stronger FPSO-focused business could result in synergies and improved operational efficiencies, potentially boosting net margins and earnings.
  
• Strategic investments and collaborations, such as the subcontract award for conversion works and the MoU with HD Hyundai Marine Solutions for decarbonization efforts, can open new revenue streams and enhance profitability.
  
• The proactive fleet rejuvenation strategy aligns with modern efficiency and sustainability trends, positioning MISC to capture future growth opportunities and potentially improve net margins and revenue stability.

MISC Berhad Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming MISC Berhad's revenue will grow by 1.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.0% today to 19.3% in 3 years time.
• Analysts expect earnings to reach MYR 2.7 billion (and earnings per share of MYR 0.61) by about April 2028, up from MYR 1.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting MYR3.1 billion in earnings, and the most bearish expecting MYR2.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.6x on those 2028 earnings, down from 27.1x today. This future PE is greater than the current PE for the MY Shipping industry at 17.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.44%, as per the Simply Wall St company report.

MISC Berhad Future Earnings Per Share Growth

Risks

• The decline in revenue and profit in the third quarter, particularly a 5% decline in revenue and a 34% decline in profit after tax quarter-on-quarter, raises concerns about the company's ability to sustain earnings growth in the face of operational challenges. (Impacts: revenue, earnings)
  
• Ongoing issues in the gas segment, including lower average rates for spot vessels and decreased utilization, suggest continued financial strain with potential long-term impacts on asset valuation and operating income. (Impacts: revenue, net margins)
  
• The proposed merger with Bumi Armada introduces uncertainties, including the absorption of Bumi Armada’s liabilities and potential share dilution, which could affect MISC's financial stability and shareholder returns. (Impacts: earnings, shareholder equity)
  
• Significant capex requirements for fleet rejuvenation and new LNG vessels may strain cash flows and lead to increased financial leverage, affecting the company's ability to fund other growth initiatives. (Impacts: cash flow, gearing ratio)
  
• Heightened geopolitical tensions in the Middle East are a risk factor that could disrupt contractual arrangements and impact the gas segment's financial performance, thus affecting overall revenue stability. (Impacts: revenue, earnings)

Valuation

• The analysts have a consensus price target of MYR8.573 for MISC Berhad based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of MYR9.9, and the most bearish reporting a price target of just MYR7.7.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be MYR13.9 billion, earnings will come to MYR2.7 billion, and it would be trading on a PE ratio of 18.6x, assuming you use a discount rate of 9.4%.
• Given the current share price of MYR7.25, the analyst price target of MYR8.57 is 15.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.