We maintain our NEUTRAL call for the sector on the back of the lacklustre outlook for the domestic oil and gas in the short-term. The prospect of contract awards remains uncertain after Petronas’ cautionary statement on reduced FY15 capex especially for the Upstream segment whilst uninspiring crude oil prices of late are not supportive of generating capex spending. Nevertheless, the Downstream segment will continue to shine on account of the RAPID project; but we believe this has been priced-in somewhat. Sector valuation has retraced, but the sector prospects remain unsupportive for a re-rating. In lieu of our sluggish outlook, we cut the target PERs on selected stocks under our coverage by 1x multiplier and advise investors to continue being stock-selective, i.e. focus on laggards with strong order-books and/or companies that have exposure to the brownfield/rejuvenation segment. Our Top Picks for 4QCY14 are BARAKAH and COASTAL.
What goes “Up”; must come “Down”. The sector was unsurprisingly a tale of two segments. The Upstream segment saw a slowdown in contract flows (RM1.4b domestic wins vs. RM3.1b in 2QCY14), whilst the Downstream segment was buoyant; driven by awards (c.RM25b) for the Refinery and Petrochemical Integrated Development (RAPID) contract.
Key contract themes and timing of Upstream awards remain unchanged. There have been no significant changes to upcoming upstream contracts and the award timing concerns previously mentioned. We gather that some of the anticipated upstream contracts (i.e. fabrication; IRM; OSV) may only emerge at the very end of 2014; and runs the high risk of spilling into 2015. Petronas’ statement on a potential reduced FY15 capex, especially for the Upstream segment, sends cautionary signals in terms of near-term prospects.
Downstream segment will continue to shine. Only c.RM27b worth of contracts, out of a supposed RM51b has been dished out thus far. As such, more is expected from the Downstream segment in the medium-term. Having said that, we suspect the focus will mainly be on sub-contractors and suppliers, which include the likes of KNM (NOT RATED); and PANTECH (OP; RM1.23) as the bulk of the large packages has already been awarded. We also believe these awards have been priced-in somewhat.
A lacklustre quarter. The domestic oil and gas outlook remains uninspiring in the short-run as: (i) the timing of contract news flows remains uncertain, (ii) Petronas’ reduced FY15 capex statement sends cautionary vibes for the sector, and (iii) crude oil price remains uninspiring. Thus, we maintain our NEUTRAL call for the sector.
Sector valuations have retraced; however, near-term prospect remains unsupportive for a re-rating. Thus we have trimmed the PERs of selected stocks by 1x multiplier. We have maintained current valuations for companies that still have: (i) near-term newsflow catalysts, i.e. YINSON (UP; TP: RM2.31) , PANTECH (OP; TP: RM1.23) and COASTAL (OP; TP: RM5.94) and (ii) deserve a re-rating on account of new businesses or favourable exposure to the selected plays like the upstream, brownfield and RAPID segments, such as BARAKAH (OP; TP: RM1.74), COASTAL, UZMA (OP; TP: RM4.30), DIALOG (MP; TP: RM1.83) and PANTECH.
Top picks. We favour: (i) BARAKAH for its growing presence within the Transport & Installation (T&I) and pipeline commissioning pipeline commissioning segments and undemanding FY15 valuations of 7.8x, and (ii) COASTAL for its move into asset-ownership that is a re-rating catalyst and also its undemanding FY15 valuations of 11.3x.
3Q14 Review – What goes “Up”; must come “Down”
Mixed feelings. The 2QCY14 results were a mixed bag with 6 companies coming below our expectations; 7 within and only 1 above. Whilst the performers and non-performers were fairly stacked, we deem the overall results as below expectations as a majority of the misses were largely caused by: (i) slower-than-expected progress on contracts that were awarded last year (ie. Pan Malaysia Hook-up and Commissioning (HUC) and T&I contracts), like DAYANG (OP; TP: RM4.52), and (ii) slower-than-expected contract awards, like ALAM (MP; TP: RM1.45), MHB (UP; TP: RM3.06), PERISAI (OP; TP: RM1.88). We suspect the trend will only reverse in 2015, thus prompting cuts for our FY14 net profit forecasts during the results season.
An unsurprising sluggish upstream segment. In 3QCY14, the domestic upstream segment saw contract awards of c.RM5.6b, which like 2QCY14, was mainly fuelled by a foreign awards (c.RM4.2b) to ARMADA (NOT RATED) by a JV partner from Angola. This was down from the cumulative RM18.5b (domestic: RM3.14b; foreign: RM14.1bn) that was won within 2QCY14. Recall, we anticipated this and mentioned in our 3QCY14 sector outlook that upstream contract flows is likely to be sluggish as most of the long-awaited contracts had been awarded in 1HCY14 whilst the pending awards (ie. offshore support vessel (OSV); fabrication and Chemical Enhanced Oil Recovery (CEOR)) are delayed for various reasons.
Downstream is the main star. Unlike the upstream segment; the downstream segment saw c.RM25b (c.USD7b) of contract awards in 3QCY14 as Petronas kick-started the awards for the RAPID project. Main winners were (i) Toyo Engineering Corp. and Toyo Engineering & Construction Sdn. Bhd (est.RM7.5b/USD2.3b); (ii) Tecnicas Reunidas SA and Tecnicas Reunidas Malaysia Sdn. Bhd. (est.RM4.9b/USD1.5b); (iii) Sinopec Engineering (Group) Co. Ltd. and Sinopec Engineering Group (Malaysia) Sdn. Bhd. (est.RM4.3b/USD1.3b); and CTCI Corp., Chiyoda Corp., Synerlitz (Malaysia) Sdn. Bhd., and MIE Industrial Sdn. Bhd. (est.RM4.2b/USD1.3b).
Source: Kenanga
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2024-08-30
ALAM2024-08-30
BARAKAH2024-08-30
COASTAL2024-08-30
COASTAL2024-08-30
DAYANG2024-08-30
DIALOG2024-08-30
DIALOG2024-08-30
DIALOG2024-08-30
KNM2024-08-30
KNM2024-08-30
KNM2024-08-30
KNM2024-08-30
YINSON2024-08-30
YINSON2024-08-30
YINSON2024-08-30
YINSON2024-08-30
YINSON2024-08-30
YINSON2024-08-30
YINSON2024-08-29
ALAM2024-08-29
ARMADA2024-08-29
BARAKAH2024-08-29
DIALOG2024-08-29
KNM2024-08-29
KNM2024-08-29
KNM2024-08-29
KNM2024-08-29
KNM2024-08-29
KNM2024-08-29
MHB2024-08-29
MHB2024-08-29
MHB2024-08-29
YINSON2024-08-29
YINSON2024-08-29
YINSON2024-08-29
YINSON2024-08-29
YINSON2024-08-29
YINSON2024-08-28
DIALOG2024-08-28
DIALOG2024-08-28
DIALOG2024-08-28
DIALOG2024-08-28
DIALOG2024-08-28
YINSON2024-08-28
YINSON2024-08-28
YINSON2024-08-28
YINSON2024-08-27
DIALOG2024-08-27
DIALOG2024-08-27
YINSON2024-08-27
YINSON2024-08-27
YINSON2024-08-27
YINSON2024-08-26
ARMADA2024-08-26
DAYANG2024-08-26
DAYANG2024-08-26
DAYANG2024-08-26
DAYANG2024-08-26
DAYANG2024-08-26
DAYANG2024-08-26
DAYANG2024-08-26
DAYANG2024-08-26
DIALOG2024-08-26
DIALOG2024-08-26
KNM2024-08-26
KNM2024-08-26
KNM2024-08-26
MHB2024-08-26
PANTECH2024-08-26
PANTECH2024-08-26
PANTECH2024-08-26
YINSON2024-08-26
YINSON2024-08-26
YINSON2024-08-26
YINSON2024-08-23
ARMADA2024-08-23
ARMADA2024-08-23
ARMADA2024-08-23
ARMADA2024-08-23
ARMADA2024-08-23
DAYANG2024-08-23
DAYANG2024-08-23
DAYANG2024-08-23
DAYANG2024-08-23
DAYANG2024-08-23
DIALOG2024-08-23
DIALOG2024-08-23
KNM2024-08-23
KNM2024-08-23
KNM2024-08-23
KNM2024-08-23
KNM2024-08-23
KNM2024-08-23
PANTECH2024-08-23
PANTECH2024-08-23
YINSON2024-08-23
YINSON2024-08-22
ARMADA2024-08-22
DAYANG2024-08-22
DIALOG2024-08-22
DIALOG2024-08-22
DIALOG2024-08-22
MHB2024-08-22
MHB2024-08-22
MHB2024-08-22
MHB2024-08-22
MHB2024-08-22
YINSON2024-08-22
YINSON2024-08-21
DIALOG2024-08-21
KNM2024-08-21
KNM2024-08-21
KNM2024-08-21
KNM2024-08-21
KNM2024-08-21
KNM2024-08-21
MHB2024-08-21
UZMA2024-08-21
UZMA2024-08-21
YINSON2024-08-21
YINSON2024-08-21
YINSON2024-08-21
YINSON2024-08-20
ALAM2024-08-20
DIALOG2024-08-20
YINSON2024-08-20
YINSON