Investment Highlight

• Mixed report card. Excluding Serba Dinamik’s 2Q2021 results which have yet to be announced, the 1HFY21 earnings delivery of the 8 companies under our coverage were mixed as 3 were above our expectations, 2 underperformed and 3 were within expectations, vs. 4 outperformers, 2 in line and 2 underperformers in 1Q2021. The companies registering abovemarket 1H2021 results were Bumi Armada, Hibiscus Petroleum (Hibiscus) and Petronas Chemicals while Dialog and Sapura suffered from higher-than-expected operating costs amid the continuing Covid-19-imposed movement restrictions. Bumi Armada’s commendable performance stemmed from lower lumpy operating costs while higher oil-driven product prices lifted the margins of Petronas Chemicals Group and Hibiscus (which also benefited from additional cargo shipments).

• However, the sector’s core 2QFY21 net profit still rose 30% QoQ to RM3.3bil largely due to higher product prices for Petronas Chemicals, MISC’s lumpy gains from a renegotiated lightering contract for 2 Aframax vessels and Sapura Energy’s lower losses. This was partly offset by higher internal gas consumption and maintenance costs at Petronas Gas and slower recognition of lease-based construction revenue from Yinson’s Anna Nery floating production, storage and offloading vessel conversion project. All in, this raised 2QFY21 EBITDA margin by 2 percentage points to 40%.

• Pandemic still impacting 2Q2021 order flows... Excluding Serba Dinamik’s RM7.7bil civil project award in 2Q2020 to build an innovation hub in the UAE in light of its accounting issues raised by its former auditor, new contract awards in 1H2021 to Malaysian oil & gas operators rebounded 2.6x YoY to RM5.6bil, largely from multiple jobs awarded to Sapura Energy. The sharp recovery 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. Even so, we note that contract rollouts are still being impacted by the global pandemic, movement restrictions and energy transition policies, which caused 2Q2021 awards to decrease 33% QoQ to RM2.2bil.

• …reflected in Petronas’ capex. While energy transition remains a longer term global process, project delays and rephasing of activities caused by movement restriction orders were the major cause for Petronas’ 1H2021 capex decreasing by 14% YoY to RM12.7bil. At this stage, 1H2021 appears to be below Petronas’ annual capex plans, accounting for 28%–32% of the national company’s target of RM40bil–RM45bil over the next 5 years. As a comparison, 1H accounted for 33%–44% of the group’s capex over the past 3 years. Recall that Petronas plans to spend 55% of the annual capex allocation on domestic investments, with the remainder on international investments. New energy initiatives will make up for 9% of its annual capex, almost double the 5% allocation set in 2020. Looking forward, climate activism by the shareholders of international oil companies amid legal suits in tandem with energy transition policies could mean 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, Petronas will prioritise cost efficiencies and technology-driven productivity while de-risking its portfolio by pivoting towards faster cashgenerating investments with less volatile profiles.

• Maintain 2021–2022 oil price projection at US$65–70/barrel as Brent crude oil prices have recovered above US$70/barrel currently after falling to US$65/barrel on 20 August this year on concerns that the Covid-19 Delta variant could dampen global demand. As US inventories slid 15% from the YTD peak of 502mil barrels on 26 March 2021 to below pre-pandemic levels at 425mil barrels currently (5% below the 2019 average of 448mil barrels), we maintain our 2021–2022 price projection at US$65–70/barrel vs. the EIA’s Short-Term Energy Outlook of US$69/barrel for 2021 and US$66/barrel for 2022. While US shale production could rebound and OPEC may continue to raise production quotas against the backdrop of the brighter oil price environment, this could be mitigated by rising global demand on the back of Covid-19 vaccine rollouts in 2H2021.

• Maintain OVERWEIGHT call with 8 BUY calls vs. only 1 SELL. We continue to like Dialog Group for its resilient noncyclical 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, plus multiple charter opportunities in Brazil and Africa. Yinson also recently signing a memorandum of understanding to supply a mid-sized floating production, storage and offloading vessel to Enauta’s Atlanta field in Brazil. 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.

Source: AmInvest Research - 7 Sept 2021