Petronas group 1Q18 core PAT grew 19.7% yoy to RM12.5bn mainly driven by higher average realised prices recorded across all products, partially offset by higher net input & production costs. The group’s CAPEX remained flat at RM12.9bn yoy in the quarter, mainly attributable to Refinery and Petrochemical Integrated Development (RAPID) Project. For FY18, we do not expect significant increase in upstream activity, given Petronas main focus in improving cost efficiency and not growth in oil reserves. . Our preferred picks are Velesto Energy (BUY; TP: RM0.39) and Dayang (BUY; TP: RM0.67)

YoY: Petronas group 1Q18 core PAT grew 19.7% to RM12.5bn mainly driven by higher average realised prices recorded across all products, partially offset by higher net input & production costs.

QoQ: Core PAT decreased 31.2% mainly due to lower sales volume, primarily from petroleum products and crude oil & condensate.

CAPEX. The group’s CAPEX remained flat at RM12.9bn yoy in 1QFY18. The capex during the quarter mainly attributable to Refinery and Petrochemical Integrated Development (RAPID) Project. For FY18, the group Is set to increase its capex to c.RM55bn (from c.RM44.5bn in FY17) with the main focus remains in downstream segment.

Outlook. Going forward we understand that Petronas Group will continue to focus more on cost efficiency rather than absolute growth in oil reserves. As a result we do not expect upstream capex to increase significantly from current level of c.RM26bn. Nevertheless, we opine that upstream activities are recovering albeit at a slower rate due to recovery of oil prices.

Preferred Pick. Velesto Energy (BUY; TP: RM0.39) Velesto is a major beneficiary of steady jack-up rig demand by Petronas Group given its role as the largest domestic jack-up rig owner.

Preferred Pick. Dayang (BUY; TP: RM0.67) The completion of dividend in specie would remove the overhang delay of relisting of Perdana shares. This would better reflect the value of the group’s stake in Perdana. Earnings recovery is also expected in 2018.

Source: Hong Leong Investment Bank Research - 31 May 2018