OGSE players may play catch-up. Following the enormous surge in share price of E&P (exploration and production) players YTD (HIBISCUS: 59%; DNEX: 30%), the OGSE (Oil & Gas services and equipment) players, whose returns have been relatively lackluster may return to the limelight. Referring to the 2016-2018 O&G bull run cycle, the OGSE players could play catch-up (Figure#1) after the rally in E&P players amid the recovery of capex spending from oil majors, underpinned by an improving earnings recovery outlook.

Petronas’ robust earnings. To recap, Petronas recorded a stellar 1Q22 core profit of RM21.2bn – its best-ever performance in the last decade mainly due to higher average realized product prices amidst elevated oil prices. In anticipation of a high oil price in the near-term (HLIB 2022 Brent oil forecast: USD100-110/brl) and improving PETRONAS’s operating cash flow, we project PETRONAS’s capex spending to increase further to RM40-45bn (vs FY21: RM30bn) annually over the next five years. This will support OGPE players to recover going forward.

Better days ahead. Despite 75% (3 out of 4) of the HLIB-covered OGSE players posted below/within earnings expectations in 1Q22, DAYANG outperformed its peers by recording a strong core profit of RM13.8m (vs -24.5m 1QFY21) despite being a seasonally weak quarter. We reckon that the strong earnings momentum will improve further for the next few quarters, underpinned by improved job orders due to lesser Covid-19 related restrictions and expenses, as well as improved projected blended vessel utilization rates YoY for Perdana Petroleum in FY22.

Double bottom breakout. Technically, DAYANG is pending for a double bottom breakout. A successful breakout above the RM1.01 neckline will indicate a downtrend reversal and spur the stock price toward RM1.13-1.15-1.25 zones. Cut loss at RM0.94.

Source: Hong Leong Investment Bank Research - 7 Jun 2022