Investment Highlights

• Balanced scorecard in 1H2024. Companies under our active coverage delivered a fair performance with 50% of companies (3 out of 6) coming in within expectations. These included Dialog, MISC and Petronas Gas. Outperformers for the sector were Bumi Armada mainly due to the revision of operating fees for floating production storage and offloading (FPSO) vessel, Armada Olombendo, in the previous quarter and Deleum, which is currently seeing the gradual recovery of its oilfield integrated services (OIS) segment. Petronas Chemicals was the only underperformer which was impacted by higher-than-expected increase in plant operating costs. Hence, sector core earnings for 1H2024 rose by 32%, driven largely by bumper earnings growth from Bumi Armada, which saw the return of contribution from FPSO Armada Kraken coupled with Deleum's margin recovery for its OIS segment.

• On a sequential basis, sector performance appears to be moderating. We observe the start of a normalising trend in 2Q2024 as core earnings increased by only 10%, largely due to the impact of a lower earnings base. During the period, Deleum continued to be the star performer, driven by a sharp 25%-pts improvement in operating margins for the OIS segment. MISC saw a decline of 17% QoQ largely due to weaker topline performance from its gas shipping segment, which saw less earnings days due to contract expiry and lower charter rates.

• More muted contract award period in 2Q2024. Owing largely to the completion of the 1-year work order extension awards to locally listed Malaysian oil and gas contractors in the previous quarter, we see a quieter award season for 2Q2024 which are in line with our expectations. Recall that the previous quarter awards are largely from a backlog of maintenance works attached to the Pan-Malaysian maintenance, construction and modification (MCM) contracts signed in 2019. Notably, Deleum secured a RM105mil contract from Petronas for the provision of MCM services up to Dec 2024.

• Revised Brent crude oil price forecast for 2024F to US$83/barrel (bbl) for 2024F from US$85/bbl previously and set 2025F at US$80/bbl. We adjust our Brent crude oil price forecast slightly to account for weaker-than-expected performance in recent months. We see the current momentum as largely driven by negative sentiments from concerns over global oil demand dynamics as China's economy softens while the transition to electric vehicles create a consumption dent in transport fuel (gasoline and diesel). However, we believe current negative sentiments are overdone given the extension of OPEC production cuts of 2.2mil bpd by the end-2024F.

• Downgraded sector rating to NEUTRAL from OVERWEIGHT previously. We see a more balanced outlook for the sector moving forward due to: (a) lower earnings growth of 5% for 2025F from 22% in 2024F after a period of easy comparables; (b) a neutral outlook for the petrochemical sector as commodity-related products continues to be weighed down by overcapacity and weak demand from China, and (c) rising downside risks for local O&G maintenance contractors due to recent developments surrounding Petronas and Petros. Driven by these factors, we turn risk-on and more selective on our buy calls. Our top picks are Dialog Group (BUY, FV: RM2.95) which is supported by a resilient non-cyclical tank terminal business coupled with the recovery of its previously loss-making maintenance-based operations, and Deleum (BUY, FV: 1.80) due to a strong market leading position within the O&G turbine space, being a primary beneficiary of the new maintenance contract upcycle and a healthy net cash balance sheet. We also like Petronas Gas (BUY, FV: 19.97), which offers a decent dividend yield of 5.4%, which can be raised further from the optimisation of its capital structure together with sustainable recurring earnings from gas transportation and processing operations. We maintain our positive outlook on the FPSO subsector but prefer contractors with existing exposure towards South America and the Africas which have a more vibrant tender scene from escalating deepwater exploration programmes.

Source: AmInvest Research - 13 Sep 2024