Investment Highlights

• Largely in line 3QFY20 report card. The 3QFY20 results of the 8 companies under our coverage were largely in line with expectations as 6 were within consensus while 2 were above. MISC benefited from its heavy engineering division unexpectedly breaking even, cushioning the drop in tanker rates while Yinson’s earnings were propelled by accelerated recognition from the commencement of Petrobras’ floating production, storage and offloading (FPSO) vessel Anna Nery. While we have not revised our forecasts for Sapura Energy, we note that its engineering and construction division’s surprisingly strong 1HFY21 EBITDA margins were boosted by lumpy contract adjustments and cost reversals.
• The sector’s core 3QFY20 net profit rose 13% QoQ to RM1.8bil largely due to Petronas Chemicals’ 2.5x surge from higher product prices following a depressed market in the previous quarter, and slightly supported by Yinson’s accelerated FPSO profit recognition. However, 3QFY20 EBITDA margin also slid 1 ppt to 36% due to Yinson’s lumpy revenue recognition.
• Order awards still sluggish. While new contract awards to Malaysian operators halved YoY to RM4.6bil in 9M2020, we note that 3Q2020 orders rebounded 45% QoQ to RM2.4bil largely due to Serba Dinamik’s lumpy civil construction job to build a RM1.5bil data centre in the UAE. Excluding Serba’s UAE project, 3Q2020 orders instead shrank 45% QoQ to RM895mil. Even so, we view the slow order flow as the early stages of recovery for the sector which plummeted to a 3-year low of only RM569mil contracts in the Covid-19-inflicted 1Q2020.
• Moving towards net-zero emission targets. Amid a target to reach net-zero carbon emissions by 2050, Petronas could be redeploying capital into more renewable energy projects. The group appears to be on track to meet its target to reduce capex by 21% and 12% opex this year due to the current Covid-19-impacted cyclical downturn which was exacerbated by the Saudi-Russian price war earlier this year. Even though a measure of optimism has returned for crude oil prices, we expect oil producers to remain cautious in rolling out projects next year amid the prolonged Covid-19 movement restrictions and social distancing measures across the new normal which could mean potentially structural changes in energy usage.
• Remain cautious on selected highly geared companies. Against the backdrop of a sharp demand drop in upstream oil services, we remain cautious on companies with high gearing levels such as Sapura Energy, which needs to restructure its RM10bil debt soon. There is a risk that Velesto’s mounting losses from weak rig utilisation could develop into debt repayment difficulties next year. For now, we are not unduly concerned that Serba Dinamik may again need an equity placement exercise to fund the working capital of its multiple overseas projects.
• Maintain 2020 oil price forecast at US$40–US$45/barrel and 2021 at US$45–50/barrel. YTD, Brent crude oil prices have averaged US$42/barrel with spot prices at US$48/barrel currently from the year-low of US$14/barrel on 22 April 2020. This is supported by US crude oil inventories declining by 10% to 488mil barrels currently from the all-time high of 541mil barrels in June this year. Hence, we maintain our crude oil price forecast at US$40–US$45/barrel for 2020 and US$45–US$50/barrel for 2021. For comparison, the EIA’s Short-Term Energy Outlook projects crude oil price at US$41/barrel for 2020 and US$47/barrel for 2021.
• Maintain OVERWEIGHT call with 6 BUY calls vs. only 1 SELL and 1 HOLD. With Brent crude spot prices stabilizing above US$40/barrel, we believe that the down cycle has reached a bottom with the worst experienced in April this year when Brent spot prices plunged to a low of US$14/barrel while futures inverted to an abnormal negative price due to lack of storage capacity

We continue to like Yinson as its earnings growth momentum from the maiden contributions of FPSO vessels Helang, off Sarawak, Abigail-Joseph in Nigeria and Anna Nery in Brazil together with multiple charter opportunities in Brazil and Africa. We like Petronas Gas, as the group’s optimal capital structure strategy and resilient earnings base translate to highly compelling dividend yields.

We also recommend Dialog Group and Serba Dinamik Holdings due to their resilient non-cyclical tank terminal and maintenance-based operations. Even though Bumi Armada is still likely to experience asset impairments towards the end of the year, the company has shown improving core profitability from higher operating performance of FPSO Armada Kraken while its major shareholder provides support against balance sheet risks.

Source: AmInvest Research - 3 Dec 2020