Investment Highlights

• Volatile report card. The 4QFY19 results of the 7 companies under our coverage were more volatile as only 2 companies – Petronas Gas and Serba Dinamik Holdings – came in line with expectations compared to 5 in FY19. Among them, 3 companies (MISC, Sapura Energy and Velesto Energy) disappointed expectations vs. 2 outperformers (Bumi Armada and Dialog Group). While MISC enjoyed higher tanker petroleum rates, the margin improvement failed to meet street’s more ambitious estimates. Velesto Energy, which registered a surprisingly strong 3QFY19 net profit from a rig utilization of 92%, registered lower-thanexpected 4QFY19 earnings due to 2 rigs undergoing zero-rated maintenance activities. Sapura Energy continued to register losses from minimal early-cycle fabrication margins derived from the huge central processing platform jobs for Sarawak’s Pegaga and India’s KG-DWN 98/2 NELP blocks amid crude oil price declines Even though Bumi Armada had to provide impairments for its legal case against Woodside Energy Julimar and vessels, the group’s core earnings exceeded consensus largely from the substantively higher margin improvement from its floating production storage and offloading vessel Armada Kraken, which has achieved a satisfactory operating efficiency of over 90%. Additionally, Dialog Group enjoyed impressive overseas job growth together with expanded plant turnaround and maintenance revenues from Petronas’ 5-year master service agreement.

• Core 4QFY19 net profit rose 11% QoQ to RM1.2bil largely due to higher contribution from most of the companies except for Bumi Armada, which was dented by charter adjustments to its Armada Kraken vessel, and Velesto Energy, from lower-thanexpected rig utilization. The sector’s 4Q2019 EBITDA margin was flattish QoQ at 36% as higher contributions from Bumi Armada, Dialog Group and Serba Dinamik were offset by Velesto Energy and Sapura Energy’s (see Exhibit 3). On a YoY comparison, the sector’s 4QFY19 declined 9% due to MISC’s lower number of petroleum vessels, Petronas Gas’ reduced gas transportation revenue under the new incentive-based regulatory regime and low margins on Sapura Energy’s early-cycle fabrication jobs.

• Malaysia’s 2019 contract awards slid 6% YoY to a lower-than-expected RM11.5bil following a lull in 1Q2019 and slower pace in 4Q2019, which registered declines of 35% QoQ and 46% YoY. We view this as the remaining fallout from the 2015–2017 award cycle dislocation. Over the medium to longer term, we expect offshore projects in Brazil, Mexico, the Middle East and West Africa to gain traction with Sapura Energy and MMHE being selected for Saudi Aramco’s Long Term Agreement programme, which allows them to bid for the kingdom’s massive offshore projects that could reach US$150bil over the next 10 years. Westwood Global Energy Group is projecting global drilling and well services expenditure to grow 19% to US$1.9tril for 2019–2023 from 2014–2018.

• Maintain our 2020–2021 crude oil forecast of US$60–US$65/barrel. While the impact of the Wuhan coronavirus (Covid-19) pandemic is still uncertain at this stage, Brent crude oil price has fallen almost 10% since the beginning of the year to just above US$52/barrel currently. This signals the potential dampening of global oil demand as US oil inventories have risen by 3% year to date to 443mil barrels. Nevertheless, we maintain our 2020–2021 crude oil forecast of US$60–65/barrel for now with Opec and its partners looking at raising their production quota reduction of 2.1mil barrels this year, with the Joint Technical Committee of the OPEC+ group recommending additional cuts of at least 600,000 barrels/day. As a comparison, the EIA’s Short-Term Energy Outlook is projecting oil prices at US$61/barrel for 2020 and US$67/barrel for 2021.

• We maintain OVERWEIGHT on the sector as order flow prospects remain bright at this stage with rising asset utilization globally which supports service providers’ improving earnings. Our base-case scenario assumes that the Covid-19 pandemic will not have a prolonged impact on crude oil prices and global demand.

• Prefer stocks with recurring income profile. While we have BUY calls for Sapura Energy and Velesto Energy, our top picks are still companies with stable and recurring earnings such as Serba Dinamik and Dialog Group. We like the recurring income business model of Dialog and Serba Dinamik, which are involved in operation and maintenance services while Dialog’s earnings visibility is further secured by the Pengerang Deepwater Terminal project with its enlarged buffer zone.

Source: AmInvest Research - 4 Mar 2020