Highlights

• YoY: Petronas group 1Q17 core net profit rose 42% mainly due to higher realized selling prices despite a drop in production volume (due to Iraq and Egypt decline) and (ii) higher PAT of downstream division on the back of more favourable product selling prices and better chemical margins.

• QoQ: Group core net profit was down by 30.5% mainly due to lower income from sale of O&G equipment and fund investment income (as reflected in corporate & others section and net FOREX loss of RM1.3bn). Excluding all these impacts, core upstream division of Petronas actually posted higher sequential PAT due to higher realized oil prices and better margins despite a marginally lower volume.

• Cash flow position. For 1Q17, CAPEX spent was marginally higher YoY mainly attributable to RAPID project in Johor. This was, however, significantly below its operating cash flow generated during the quarter. YoY, its operating cash flow improved 85% due to higher oil prices. Our back of the envelope calculations has yielded annualized cash flow of RM72bn for the group, which is a healthy level.

• RM13bn dividend requirement not an issue for now. For FY16, Petronas group proposed RM13bn (FY15: RM16bn) worth of dividends to be paid in FY17 in instalments. If its operating cash flow is sustained throughout 2017, the dividend would be self-financed through operating cash flow (assuming a comparable full-year CAPEX of RM50bn).
   
• Benefit of Aramco deal could be back loaded. While the Aramco deal would be indirectly beneficial for local upstream industry, it may not be realizable in 2017 as the details of the deal have yet to be firmed up. It is now more than likely that Petronas would have to maintain its CAPEX level in RAPID in 2017 (i.e. lower cash flow available for upstream CAPEX) before investments from Aramco kick in possibly in 2018 the earliest.

Rating

NEUTRAL ( ↔ )

• While improvement is expected in 2017 for O&G sector, we believe it has already been reflected in the market value of stocks under coverage. Meanwhile, we do not anticipate major CAPEX upcycle by Petronas in the year due to uncertainty in oil prices.

Valuation

• 2017 is expected to be a better year for O&G but moderate recovery in the sector seems to be priced in by the market at current level with average CY17 PER at 18x (higher than 10-12x PER for current oil price scenario).

• Top Pick – Dayang (BUY; TP:RM1.42) -Primary beneficiary of MCM and HUC Pan Malaysia contract award which will be announced in 2H17. -Relisting of Perdana further unlocks value for shareholders through dividend-in-specie.

Source: Hong Leong Investment Bank Research - 5 Jun 2017