Petronas recorded 1Q21 core profit of RM7.5bn (QoQ -RM1.5bn, YoY: RM8.5bn). 1Q21 capex spending of RM6.7bn (-21% YoY) was broadly in-line with our expectations of c.RM40bn, constituting just 17% of our capex spending forecast of c.RM40bn in FY21 as we expect its better results from higher crude oil prices and a recovery in oil demand to continue. We upgrade our Brent crude oil price per barrel assumption from USD60/65 for CY21/22f to USD65/70 and maintain our OVERWEIGHT call on the sector. Our top picks for the sector are Bumi Armada (BUY; TP: RM0.80) and Dialog (BUY; TP: RM3.45). We have also downgraded our call on Serba from Hold to SELL at TP of RM0.78 (30% discount to FY21 BVPS) to address the audit related matters raised by KPMG. We believe that investors would remain cautious on Serba until it resolves its audit related issues.

QoQ. 1Q21 core profit of RM7.5bn (QoQ: -RM1.5bn) was due to higher margins from higher ASP for its petroleum products.

YoY. Revenue declined by 12% YoY due to lower ASP its products. Subsequently, the Company recorded a core profit of RM7.5bn, down -11% YoY.

Capex. Petronas’ capex stood at RM6.7bn (-37% QoQ, -21% YoY) despite better QoQ operating cash flow of RM14.3bn (+76% QoQ, -19% YoY). We expect Petronas to elevate its capex spending in the coming quarters due to higher crude oil prices and higher global oil demand.

Dividend. None Declared (none SPLY).

Oil Price forecast. We upgrade our Brent crude oil price per barrel forecast from USD60/65 for CY21/22f to USD65/70 based on the following reasons: (i) OPEC+’s commitment to provide a good equilibrium for oil supply, (ii) the timeline and efficacy of vaccine rollouts leading to significantly higher oil demand in 2H21 (could neutralise OPEC+’s easing of production cuts), (iii) the economic recovery from US, Europe and China from the Covid-19 pandemic, (iv) the massive under-investments on O&G capex from oil majors like Exxon, Shell and Chevron would lower the future supply of oil.

Forecast and TP changes. We have downgraded Serba Dinamik from a HOLD to a SELL at TP of RM0.78 (from RM1.45) to address the uncertainties pertaining to the audit matters raised by KPMG from Serba’s Bursa announcement on Friday 28th of May 2021. We have changed our valuation method from P/E to P/B as we opine that there is now earnings quality uncertainty following the ongoing independent investigation. We believe that investors would remain cautious on Serba until it resolves its audit relate d issues. Our TP of RM0.78 is based on a 30% discount to its FY21 BVPS. No changes in forecasts or TP were made for other O&G stocks within our coverage besides Serba.

Maintain OVERWEIGHT. We believe that the fundamentals of the O&G sector are turning positive, with (i) higher oil prices, (ii) stronger commitment from OPEC+ to keep oil prices afloat, (iii) higher impending capex from Petronas in FY21 albeit not at pre Covid levels, (iv) timeline of vaccine rollouts and (v) the strong economic recovery from China, US and Europe. Our top picks for the sector are Bumi Armada (BUY; TP: RM0.80) for its strong FPSO business and fast improving balance sheet and Dialog (BUY; TP: RM3.45) as we believe that its share price has bottomed out and its growth in sustainable earnings and potential for further expansions for its tank terminals business will provide upside for the Company.

Source: Hong Leong Investment Bank Research - 1 Jun 2021