News

• The focus of ETP Annual Report 2014 was to highlight the resiliency of the Malaysian economy despite series of adverse events (i.e. airline tragedies, falling oil prices & East Coast flood). Pemandu said all critical KPIs in 2014 for both NKEAs & SRIs were either achieved or surpassed. The PM said ETP & GTP efforts have resulted in stable economic growth, creation of high income jobs, robust capital formation and commendable fiscal reforms.
• No new projects were announced. Critical ETP targets for 2015 are mainly continuation of existing EPP projects.
• The PM said the aim for a balanced budget by 2020 remains on track. Net basis, GST is expected to yield at least RM5.6bn to the government’s revenue, which has been rising since ETP implementation.
• In an analyst briefing held earlier, SPAD CEO En. Mohd Nur said that bilateral agreement of High Speed Rail (HSR) may only conclude in 3Q15. Construction work will only start in 3Q16.
• During the O&G panel discussion, Petronas Senior VP En. Adif shared that Petronas is still in cost-cutting mode despite recent recovery in oil prices. For 2015, Petronas will focus on projects that will thrive in low oil price environment. Petronas has also formed “Cost Reduction Alliance” with local OGSE players to relook at cost structure. He also said one of the RSCs for marginal field will be reviewed.

Comments

• On the macro front, we concur that ETP implementation (line-up of projects) will help to sustain growth momentum in 2015. Subsidy reforms and GST implementation will also help to ensure fiscal sustainability. We maintain our 2015 real GDP growth forecast at 5.0%.
• The timeline of HSR is broadly in line with our expectations. We understand that bidders of the HSR project include Gamuda (Hold; TP: RM5.30), MMC, UEM and YTL, undertaking joint-venture with their respective foreign partners.
• On the O&G sector, we maintain our NEUTRAL call on the sector in view of the Petronas capex cut (15-20%) and reduction in operational expenditure. Asset owners such as drilling, OSV and fabrication service providers will be negatively impacted by lower charter rate (average ~10- 15% declines) and utilization rate. We remain cautious on MMHE (Sell; TP: RM1.11), UMW O&G (Sell; TP: RM2.50) and Perisai (Hold; TP: RM0.69).
• We are not surprised that one of the existing RSCs will be reviewed due to weak oil price environment. We understand that breakeven cost for marginal field is around US$65/bbl and existing RSC contractors are working hard to lower development cost to make sure marginal fields are still feasible.
• We prefer companies i) higher earning visibility; ii) manageable gearing level; iii) exposure to services and maintenances related to producing field; and iv) RAPID. Top picks are Bumi Armada (Buy; TP: RM1.54), KNM (Buy; TP: RM0.88) and Perdana (Buy; TP: RM1.30).

Source: Hong Leong Investment Bank Research - 29 Apr 2015