MISC Integrated Annual Report 2020

DELIVERING OUR STRATEGY In 2020, we continued to diligently execute and deliver on the MISC2020 corporate strategy and the 2016-2020 Sustainability Strategy, undeterred by the turbulent external environment. As 2020 is the final year of both strategic plans, we set out our five-year achievements in this section. In summary, over the past five years, MISC has demonstrated our capabilities to compete with the best in the international market in winning projects and delivering on our commitments to customers. Our people have exhibited passion, tenacity and agility to meet the strategic priorities set. We have also made meaningful progress in building a sustainability-oriented culture towards perpetuating our organisation for the long term. The strategies under MISC2020 have boded well in the past five years and has been stress-tested by the extreme combination of COVID-19, crash in oil price and global economic recession in 2020. The secured income strategy has provided stability to the Group with a large base being built up to ride through any future economic headwinds as we journey onwards. As explained in Our Strategic Focus section on pages 64 to 65, the five-year MISC2020 strategic plan was developed in late 2015, against a backdrop of a collapse in the oil price. At the same time, the Group was facing the prospect of tapering revenues due to future contract expirations. MISC2020 was thus crafted with the targets of achieving a sustainable level of secured profits and ROACE with the aim for MISC to stay tenable in the worst of cycles. The oil, petroleum and LNG shipping markets continued to be volatile during the past five years as they went through their respective market cycles and disruptive events such as trade and price wars, geopolitical incidences, sanctions and a global pandemic. Nevertheless, for MISC, the strategy based on secured income was the right move for us during this period and has paid dividends. Guided by the strategic priorities under MISC2020, the Group focused on winning long-term contracts with reputable clients in identified growth markets. The projects secured in terms of capital expenditure has grown steadily year on year and 2020 was the most successful year as we secured USD2.8 billion in new investments. These assets and contracts will contribute towards replenishing and growing our secured income in the future. Over the five-year period, MISC delivered strong and relatively stable cash flows from operations (CFO) of above RM4.1 billion per year and exceeding RM5.5 billion in 2019 and 2020. The dip in 2017 and 2018 was mainly due to the very challenging crude oil tanker market as well as several charter expiries during that time. The proportion of total CFO contributed by secured income contracts also rose over the period, ranging from around 80% to about 90% currently. Net profit after tax (NPAT) did not move entirely in tandem with CFO during the period mainly due to the manner in which revenue and profit is recognised for contracts under finance lease accounting as well as one-off non-cash items. In the last five years, we have consistently maintained a high dividend payout percentage of more than 25% of our annual CFO, with payment of 30 sen per share from 2016 to 2018, and increased to 33 sen in 2019 and 2020. This is in line with our goal to deliver sustainable returns to our shareholders. Prior to the development of MISC2020, the Group’s ROACE was averaging between 7% to 8% from 2013 to 2015. However, the average ROACE for the five-year period from 2016 to 2020 (MISC2020) dipped to 4.3%, which reflects, amongst others, one-off items and impairments recognised as required by the accounting standards, as well as the impact of accounting treatment of finance lease for new assets which replaced expiring assets recognised under operating lease. There is a mismatch between cash flows and accounting profit recognised under finance lease as compared to operating lease. These affected the overall ROACE measurement, which does not reflect the true performance of the Group. The Group’s ROACE was also impacted by volatile performance in the Petroleum & Product Shipping and Marine & Heavy Engineering segments, as well as the impact of the GKL arbitration that significantly impacted the earnings in 2020. Over the years, Management believes that a metric based on cash flow, such as CFO return on total assets (CFROA), would be more reflective of MISC’s performance. Based on CFROA, MISC’s ratios have been fairly stable at around 9%-11%, with the exception of 2018, where it fell to 8% due to the reasons stated earlier. We have therefore moved towards this cash flow-based measurement in determining our return on assets, which better reflects the stable returns and secured cash flows that we generate from our long- term charter contracts. As we move beyond 2020, the Group continues to emphasise on secured income as a strategic agenda moving forward to ensure that we are able to withstand any major shocks and ride through the volatility of the market environment. Below are the detailed results of the five-year MISC2020 and 2016 - 2020 Sustainability strategic priorities: MISC2020 ACHIEVEMENTS KEY FOCUS AREA Capex Value for Projects Secured 0 500 1000 1500 2000 2500 3000 2016 290 2017 440 2018 900 2019 1,100 2020 2,800 Capex Value USD’mil Cash Flows From Operations and Net Pro t/(Loss) After Tax -1000 0 1000 2000 3000 4000 5000 6000 2016 2,793 5,222 1,991 4,739 1,284 4,099 1,436 5,579 (170) 5,588 2017 2018 2019 2020 Net pro t/(loss) after tax Cash ow from operations RM mil CFO Return on Total Assets (CFROA) 0 2 4 6 8 10 12 2016 9.3% 9.4% 7.9% 10.8% 10.8% 2017 2018 2019 2020 CFO/total assets % return • Participated in various tenders since 2016 and successfully secured long-term contracts from four new third-party clients: » » ENI SPA for two mid-size LNG vessels on a five-year charter contract (2018) » » SeaRiver Maritime LLC (a subsidiary of ExxonMobil) for two LNG carriers on a 15-year charter contract (2019) » » Diamond Gas International Pte. Ltd. (a subsidiary of Mitsubishi Corporation), via a partnership with NYK and Mitsubishi Corporation for two LNG carriers on an 18-year charter contract (2019) » » Zhejiang Satellite Petrochemical Co. Ltd. (STL) for six VLECs on a 15-year charter contract; this also marked MISC’s entry into the China market (2020) REFERENCE TO OTHER SECTIONS KEY ACHIEVEMENTS STRATEGIC PRIORITIES MATERIAL MATTERS UNSDG LNG Asset Solutions Business Review on pages 136 to 143 Project and financial performance Risk management Values and governance LNG Asset Solutions i. Grow shipping business including third party business portfolio • Participated in various tenders since 2016 to capture non-conventional LNG business, and successfully expanded into the ethane transport business in 2020 with the acquisition of six VLECs on long-term charters with STL as noted above. Two vessels have been delivered in December 2020 and January 2021 respectively • MISC marked its maiden foray as the commercial operator and ship manager for Southeast Asia’s first LNG bunker vessel (LBV) in 2020. This LBV is chartered by PETRONAS LNG Sdn. Bhd. for a period of three years ii. Develop non-conventional LNG solutions to broaden our revenue sources PILLAR/KEY FOCUS AREA 1: TO DRIVE SUSTAINABLE VALUE FOR OUR SHAREHOLDERS Dividend Payout (% of NPAT and % of CFO) -1,000 0 20 40 60 80 100 120 2016 48% 26% 67% 28% 104% 33% 103% 26% 85%* -867% 26% 2017 2018 2019 2020 Dividend payout (% of NPAT) Dividend payout (% of CFO) *excluding GKL arbitration impact RM mil FY2016 FY2017 FY2018 FY2019 FY2020 Dividends Per Share (sen) 30 30 30 33 33 // Key Messages / Highlights / Strategic Review / Sustainability / Financial Review ////// MISC Berhad / Integrated Annual Report 2020 4 90 MISC Berhad / Integrated Annual Report 2020 4 91 ////// Financial Review / Sustainability / Strategic Review / Highlights / Key Messages // Section Section