Investment Highlight

• Largely in line report card… The 9MFY21 earnings delivery of the 8 companies under our coverage is largely within expectations with 6 in line vs. 1 outperformer and 1 disappointment. The sole outperformance came from Petronas Chemicals Group which enjoyed higher product prices that are closely correlated to crude oil while Sapura Energy disappointed due to huge loss provisions from slower fabrication activities amid Covid-19 restrictions. As a comparison, there were 3 outperformers, 2 underperformers and 3 within expectations in 2Q2021.

• … with flattish sector’s core 3QFY21 net profit. In 3QFY21, the sector’s EBITDA fell 26% QoQ to RM3.9bil while core net profit decreased by 43% QoQ to RM1.9bil largely due to the substantive drag from Sapura Energy’s losses. Excluding Sapura Energy’s results, 3QFY21 EBITDA and core net profit were flat with both rising by only 1%. The stronger QoQ earnings growth surprisingly came from Petronas Gas’ 35%, benefiting from lower internal gas consumption, decreased operating costs and JV forex gains. Likewise, 3QFY21 EBITDA margin dropped 10%-points to 30%. Excluding Sapura Energy, the margin rise slightly by 1% point to 40%.

• Balance sheet risks resurface for selected stocks. While Sapura Energy’s RM7bil short-term debt will be reclassified back to long-term debt after receiving the banks' waiver from a breach of debt covenants, this issue could re-emerge by 4QFY22 given negative EBITDA prospects for the full year. Hence, despite the significantly improved crude oil price scenario, asset-heavy companies such as Sapura Energy, Velesto and Alam Maritim Resources are still struggling with heavy debt shouldered from past acquisitions during the pre-2014 uptrend.

• Recovery in 3Q2021 order flows. The sector’s contract awards in 3Q2021 to Malaysian oil & gas operators rebounded 86% QoQ to RM4.2bil (Exhibit 2), largely from multiple jobs awarded to Sapura Energy. Excluding a lumpy RM1.5bil construction award to Serba Dinamik to build a data centre in Abu Dhabi in August 2020, 3Q2021 orders rose 41% YoY.

• Overall sector momentum intact. Notwithstanding the Limbayong delay or potential re-bidding exercise, we remain convinced that oil & gas contract rollouts will gather momentum. We expect selected segments in the value chain to be better positioned to benefit from projects sanctioned by national oil companies, such as the floating production storage and offloading (FPSO) sub-sector given the decimated number of operators during the previous downturn in 2015-2017.
  Recall that Yinson was the sole bidder to finally secure the FPSO charter of the Parque das Beleias field in Brazil that has been cancelled twice over the past year. Yinson is also hopeful of securing the contract by January next year for an FPSO with potential conversion costs of up to US$500mil to the Atlanta field in the Santos Basin, offshore Brazil after signing a memorandum of understanding to exclusively negotiate with Brazil-based Enauta Participacoes S.A. Besides bidding for the Pecan charter off Ghana with its purchase option for Woodside's Nganhurra FPSO, Yinson together with Technip Energies are undertaking pre-front-end engineering and design (FEED) services for Total Energies for two large FPSOs to be deployed in Cameia, Block 20/21, Angola and Maka, Block 58, Suriname.

• Maintain 2021–2022 oil price projection at US$70–75/barrel as Brent crude oil prices have fallen from the 7-year peak of US$85/barrel in mid-October this year to below US$70/barrel currently on resurgent fears that the Covid-19 Omicron variant could again dampen global demand. As US inventories slid 14% from the YTD peak of 502mil barrels on 26 March 2021 to below pre-pandemic levels at 433mil barrels presently (3% below the 2019 average of 448mil barrels), 2021–2022 price projection is in line with the EIA’s Short-Term Energy Outlook of US$72/barrel for both 2021 and 2022. Notwithstanding rising global vaccination rollouts, we are cautious on the emergence of new viral variants and the possibility of Iranian crude reentering global markets, rebound in US shale production and further relaxation of OPEC production quotas.

• Maintain OVERWEIGHT call. We continue to like Dialog Group for its resilient non-cyclical tank terminal and maintenance based operations and Yinson's recent win for the Parqe das Beleias FPSO charter together with 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. Meanwhile, Petronas Gas offers highly compelling dividend yields from its optimal capital structure strategy and resilient earnings base.

Source: AmInvest Research - 3 Dec 2021