WHAT’S NEW

On 31 Jul 18, Petronas and Minister of International Trade and Industry (MITI) launched the VDPx, a new vendor development scheme which is an evolution on top of the existing VDP programme (1993). Petronas said this is part of its initiative to boost the business capabilities of the service contractors.

COMMENT

• Rationale. This initiative is a rejuvenation of Petronas’ efforts to nurture local O&G vendors into champions that can create high value. It empowers VDP anchors to develop their own ecosystem of vendors to support their businesses. In our view, the key difference with the existing VDP programme is the programme opens new doors for multiplier effects of cross-collaborations between vendors, large service contractors and oil majors, with the key intention is to catalyse the “graduation process” of selected vendors.
• Possibilities for consolidation. Although M&As is not the key intention, the collaboration in our view may rekindle potential M&As in the long term future. For example, when companies under the programme’s “nurture” grow vertically or geographically in the value chain, and when bidding for more complex projects, may consider more serious forms of partnerships. While this may offer trading opportunities in a sector where earnings visibility remains poor, there will naturally be cases of good and bad apples if such M&As occur. Among our covered companies, only a few stocks have strong balance sheets (stable cash flow generation and low net gearing) to consider for investments or M&As. These are Serba Dinamik, Deleum, and MISC.
• Maintain Sector MARKET WEIGHT. We advocate investing in strong international O&G players as they have visibility for earnings upgrades and do not depend on Petronas work orders. Our top BUY is Serba Dinamik (Target: RM4.30), which should see an earnings rerating from a growing orderbook to >RM7b. We like FPSO players such as Bumi Armada (Target: RM1.06), on earnings growth once the Kraken final acceptance is concluded by 2H18, and Yinson Holdings (Target: RM5.30) given the potential long-term earnings rerating from new projects. For non-rated ideas, Velesto Energy (VELEST MK) and Reach Energy (REB MK) have potential for an earnings turnaround.

Source: UOB Kay Hian Research - 1 Aug 2018