Investment Highlights

• Slightly disappointing 1QFY22 results. 1QFY22 earnings of 7 companies under our coverage came in slightly lower than expectations as only 2 companies delivered positive earnings surprises, in stark contrast to 3 underperformers while 2 were within expectations. That generally pales in comparison to 5 in-line and 2 below expectations during the 4QFY21 cycle. The outperformers were: (i) Petronas Chemicals Group, supported by higher product prices and lower operating costs; and (ii) Bumi Armada on lower operating expenses, depreciation expenses and finance costs that more than offset the drop in the share of profit of JVs. On the flipside, Dialog Group, Hibiscus Petroleum, MISC and Petronas Gas posted lower-than-expected earnings.

• Modest growth in sector core profit. The sector’s 1Q2022 EBITDA registered a modest gain of 6.9% QoQ backed by stronger performance from the majority of the companies within our coverage with the exceptions of Hibiscus Petroleum and Deleum. 1Q2022 core net profit (CNP) on the other hand, came in only slightly higher by 1.4% QoQ. On a YoY basis, EBITDA rose by 14.2% and CNP by 20.2% as the stronger performance by Petronas Chemicals and Bumi Armada outpaced the drop in earnings delivery from others.

• Slower job flows. The sector’s 1Q2022 contract awards to Malaysian oil & gas operators remained robust at RM2.02bil (Exhibit 2), largely contributed by: (i) Dialog Group’s award of RM724mil engineering, procurement, construction, and commissioning (EPCC) contract of a new melamine plant and bagging facilities in Kedah by Petronas Chemicals; and (ii) Wah Seong Corporation’s award of RM1.06bil contracts involving the provision of line pipe thermal insulation services for the East African crude oil pipeline and feeder line project. All in, job awards were still down by 62% QoQ compared to 4QFY21 which included a lumpy RM4.5bil contract to Coastal Contracts involving the construction of an onshore gas sweetening plant in Mexico. Excluding this onshore job, 1Q2022 contracts would have surged 2.5x QoQ.

• Better prospects of selected segments. We expect selected segments in the value chain to be better positioned to benefit from higher oil prices and projects sanctioned by national oil companies. Oil and gas operators directly exposed to upstream production such as Hibiscus Petroleum and the floating production storage and offloading (FPSO) sub-sector stand to benefit given the decimated number of operators during the previous downturn in 2015–2017.

• Higher Petronas capex a boon to the sector. As the state-owned oil and gas company earlier announced a higher 2022 capex guidance of RM60bil, which is 26% above its pre-pandemic normalised spending levels of RM47.8bil in 2019, domestic oil and gas players anticipate reaping higher job flows over the coming quarters. Notably, the RM60 bil capex for 2022 also represents a 97% jump from RM30.5 bil in 2021. In Petronas’ 1QFY22 results, its capital investments of RM7.4bil account for 15–19% of its 2022 capex guidance. As a comparison, 1Q accounted for 15%–25% of the group’s capex over the past 3 years. On a more promising note, 1QFY22 capex reached close to its 2019 spending level, representing a 12% YoY increase compared to 1QFY21 capex of RM6.6bil, in which domestic capex expanded by 30% YoY.

• Maintain Brent oil price projection at US$100–110/barrel for 2022 and US$90–100/barrel for 2023. With Brent oil prices staying strong and steadily trading above US$100/barrel, we maintain our view that crude oil prices will remain elevated over an extended period. This stems from the uncertain geopolitical impact from Russia’s Ukraine invasion that has triggered cascading sanctions, voluntary shunning of investments by international oil companies, substantive global supply chain disruptions and elevated risk premiums for commodities. Besides voluntary corporate sanctions on Russia, supply shortfall risks are escalating with major oil-exporting nations unable to ramp up production to pre-pandemic levels due to chronic under-investment over the past 5 years amid investors’ persistent energy transition-driven prerogatives.
  More recent developments including the outcome of the OPEC+ meeting which hinted at only a modest increase in oil production and the potential resurgence in oil consumption in China following the gradual reopening of Shanghai, are expected to result in a widening supply deficit and subsequently support bullish crude oil prices. Still, we expect oil prices to take a breather next year on a slower global economic growth outlook that could dampen oil demand while fresh investments in the sector could reignite higher production expectations.

• Reiterate our OVERWEIGHT rating on the sector with 4 BUY calls and 2 HOLD. Dialog Group remains one of our top picks for the sector on the back of its resilient non-cyclical tank terminal and maintenance-based operations, as well as steady earnings growth. We also like Petronas Gas as it offers highly compelling dividend yields from its optimal capital structure strategy and resilient earnings base.
  However, we maintain HOLD on Hibiscus Petroleum as its current share price has reached near our fair value despite the anticipation of solid FY22F–23F CNP growth on higher crude oil prices and Repsol’s additional earnings contribution. Likewise, MISC remains a HOLD due to lofty valuations that limit potential upside.

Source: AmInvest Research - 10 Jun 2022