Investment Highlight

• Improved report card. Excluding Serba Dinamik’s 1Q2021 results, which have been postponed later to this month due to delays caused by the Covid-19 pandemic, the 1QFY21 earnings delivery of the 8 companies under our coverage have improved QoQ as 4 were above our expectations while underperformers were MISC and Dialog. While MISC was impacted lower petroleum tanker rates, Covid 19 restrictions led to slower recognition of Dialog’s technical/plant maintenance services. Bumi Armada’s commendable performance stemmed from peak production from the floating production, storage and offloading (FPSO) vessel Armada Kraken, which has resolved its recurring technical problems in the North Sea while higher product prices lifted the bottomlines of Petronas Chemicals Group and Hibiscus Petroleum. Additionally, Sapura Energy’s FY21 loss of RM161mil was not as bad as we expected due to substantive cost reductions measures implemented over the past 2-3 years.

• The sector’s core 1QFY21 net profit rose 16% QoQ to RM2.6bil largely due to higher product prices for Petronas Chemicals together with lower operating costs and lumpy associate contribution for Petronas Gas. This was partly offset by Sapura Energy’s engineering, procurement, construction and commissioning (EPCC) margin normalisation, decreased leased-based EPCC contribution from Yinson’s FPSO and lower petroleum tanker rates for MISC. This drove down 1QFY21 EBITDA margin by 4%-point to 38%.

• Energy transition agenda could raise national oil companies’ global presence. Climate activism by the shareholders of international oil companies amid legal suits in tandem with energy transition policies could mean that national oil companies securing a larger share in global oil production over the next 10-20 years. Against a target to reach net-zero carbon emissions by 2050 under its “Great Reset” programme, recall that Petronas will prioritise cost efficiencies and technology-driven productivity while de-risking its portfolio by pivoting towards faster cash-generating investments with less volatile profiles. While this transition remains a longer-term process, project delays and rephasing of activities caused by movement restriction orders cut Petronas’ 1Q2021 capex by 21% YoY to RM6.7bil, mainly from spending in the upstream (-45%) and to a lesser extent, downstream (-27%) and gas/new energy (-9%) segments. At this stage, the 1Q2021 appears to be below Petronas’ annual capex plans, accounting for 15%–17% of the national company’s target of RM40bil - RM45bil over the next 5 years. As a comparison, 1Q accounted for 17%–25% of the group’s capex over the past 3 years.

• Rebound in 1Q2021 order flows. Notwithstanding Petronas’ slower domestic spending, new contract awards for the companies listed in Malaysia surged 5.8x YoY and 2.2x QoQ to RM3.3bil in 1Q2021, largely from multiple jobs awarded to Sapura Energy. The much stronger YoY rebound stems from the spending collapse to only RM569mil in 1Q2020 due to the earlier Saudi-Russia price war and onset of the Covid-19 pandemic.

• Maintain 2021-2022 crude price expectations at US$60-65/barrel. Brent crude oil prices have risen by 15% to US$70/barrel currently from US$61/barrel in 1Q2021 on rising global demand, supported by US inventories sliding 4% from the YTD peak of 503mil barrels on 19 March 2021 to 484mil barrels currently. While US shale production could rebound and Opec continue to raise production quotas against the backdrop of the brighter oil price environment, we believe that this could be mitigated by rising global demand on the back of Covid-19 vaccine rollouts in 2H2021. Hence, we maintain our 2021– 2022 price projection of US$60–65/barrel vs. the EIA’s Short-Term Energy Outlook of US$62/barrel for 2021 and US$61/barrel for 2022.

• Maintain OVERWEIGHT call with 8 BUY calls vs. only 1 SELL. We continue to like Dialog Group for its resilient non cyclical tank terminal and maintenance-based operations and Yinson’s strong earnings growth momentum from the full-year 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 also like Sapura Energy as its completed RM10bil debt restructuring package positions the formidable EPCIC group to secure fresh global orders. Meanwhile, Petronas Gas offers highly compelling dividend yields from its optimal capital structure strategy and resilient earnings base.
  Our SELL call is maintained on Serba Dinamik, which has triggered an investigation by the Securities Commission following plans, now withdrawn, to replace its auditor KPMG, who raised concerns on multiple transactions and balances, and appointment of an independent special reviewer of those issues. We have lowered Serba’s FV to RM0.65/share (from RM1.26/share earlier), pegged to a 30% discount to net book value (post-10% private equity placement in January 2021).

Source: AmInvest Research - 4 Jun 2021