Stock Name: MISC
Company Name: MISC BHD
Company Name: MISC BHD
| Research House: OSK | Price Call: BUY | Target Price: 7.45 |
Tanker rates are rising due to strong demand from China, thereturn of the Libyan barrels and the build-up of tensions in Iran as oil issourced from elsewhere. We believe the tanker market hit bottom in 3Q, notingthat forward freight agreement (FFA) rates have been inching up since end-Sept2011. This increases the possibility of the tanker segment recovering fasterthan expected by early 2014. We arestill of the view that at current levels, MISC is trading at an attractive P/B ofless than -2 std deviations. With a 37% upside to our fair value of 1.5x P/B,we still advocate a Buy on MISC, with its FV unchanged at RM7.45.
VLCC tanker rates upsharply. The daily returns for VLCCs in the benchmark Saudi Arabia to Asiaroute soared to a 13-month high of USD41,093 (up 114% m-o-m, 76% yo-y), spurredby strong demand from China. Note that rates also went up to close to USD40,000/day just before the Chinese New Year in anticipation of a comeback in demand(see Figure 1 overleaf). Apart from higher demand, some of the positive driverswere the return of the Libyan barrels, which had a positive impact on theAframax and Suezmax markets, and a build-up in tensions in Iran as oil wassourced elsewhere, thus lengthening voyages and adding cost savings to thetonne-mile balance. The higher refinery utilization rates as a result ofstronger exports of refined products from the US' Gulf Coast further boosteddemand. As a result of the improving collective demand for oil shipments, thesurplus in VLCCs hit a 17-month low (see Figure 2), which was positive forfreight rates.
Tanker rates bottomedin 3Q2011. We opine that the tanker market bottomed in 3Q as forwardfreight agreement (FFA) rates have been inching up since end-Sept. As of yesterday,the FFAs on July contracts for VLCC shipments for the Arabian Gulf to Japan haveappreciated by 41% (see Figure 3 overleaf) compared with a week ago.
Contango effect kicksin. Furthermore, the contango pricing effect (when current price is morethan future contract price) is emerging on oil price's movements due to the tendency to store oil given the risk of war and an oil shortage due to EUsanctions on exports from Iran effective 1 July. This had prompted traders to store cargo at sea, which ultimately boosted demand for tankershipping. But this could prove to be disastrous if the situation prolongs as itwould stoke artificial demand, which could later lead to another oversupply inthe market.
Orderbook to existingfleet drops. The high level of scrapping and slower newbuilding orders haveresulted in a decline in the orderbook to fleet ratio (see Figure 4 overleaf). Theoil tanker segment's ratio is now at its lowest of 13-16% of total fleetcompared with other segments (container: 23%, ore carriers: 51%, bulk: 27% andchemical: 24%).
Source: OSK188
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