Petronas recorded 1H18 earnings jump of 47% YoY, thanks to higher average realised prices (average Brent crude prices +35% YoY) coupled with recognition of non-FID costs for Pacific Northwest LNG in Canada in 1H17. The group has revised its dividend payment commitment to the government to RM24b, from previously RM19b, representing a 50% increase from RM16b in 2017. And while 1H18 earnings saw an impressive jump, operating cash flow only improved by 5% YoY, with the group also registering lowered capex by 7% to RM19.8b. That said, we expect lower capex levels from Petronas going forward, with the group guiding capex of RM40-50b for 2018, down from its previous guidance of c.RM55b and in-line with 2017 of RM44.5b. Meanwhile, recapping the recent round of corporate results, most of our stock coverages posted results that were within expectations, with results disappointment ratio improving from previous quarters. Nonetheless, we are keeping our NEUTRAL stance on the sector, maintaining our cautiously optimistic view, as we still prefer names with strong earnings delivery, e.g. SERBADK, YINSON, and DIALOG.

Healthy 1H18 Petronas earnings. Petronas recorded core net profit of RM21.7b for 1H18 (arrived after stripping-off impairments), a 47% jump YoY from 1H17, thanks to: (i) better revenue (+8%) due to higher average realised prices (average Brent crude prices for 1H18 at USD71.2/barrel, versus USD52.7/barrel in 1H17), masking effects of the strengthening Ringgit, coupled with (ii) non-Final Investment Decision (FID) costs for Pacific Northwest LNG project in Canada recognised in 1H17. Similar for 2Q18, Petronas’ core earnings of RM11.4b leapt 80% YoY due to: (i) better revenue (+15%) from higher average realised prices offsetting strengthening of Ringgit, coupled with (ii) non-FID costs for Pacific NorthWest LNG project in Canada in 2Q17. Sequentially, core earnings improved 10% QoQ, largely helped by lower expenses from better cost optimisation, with core operating profit margins improving by 2 ppt to 33%, coupled with a slightly higher revenue (+2%).

Higher Petronas dividend for 2018. Meanwhile, Petronas has also revised its 2018 dividend payment target to the government to RM24b. This was revised higher from the RM19b it had planned earlier, as well as representing a 50% increase from the RM16b it paid in 2017. YTD, Petronas has declared dividend payments of RM8b so far. And while 1H18 core earnings displayed an impressive YoY jump by 47%, the group’s operating cash flow only improved 5% YoY. As such, with the higher dividend payment commitment, we believe we could be seeing lower capex from Petronas going forward. In fact, the group has reportedly guided total expected capex of RM40-50b for 2018, down from its earlier guidance of c.RM55b and comparable to RM44.5b in 2017. For 1H18, Petronas’ recorded lower capex by 7% to RM19.8b, mainly attributed to the Pengerang Integrated Complex (PIC) in Johor, which is about 93% completed currently.

2QCY18 results season recap. This results season came in fairly acceptable as 11 out of our 16 coverage stocks posted results that were in-line of expectations. Meanwhile, two were above expectations, both of which are Petronas counters (PCHEM and PETGAS), while another three were below expectations (ARMADA, COASTAL and MHB). Nonetheless, the results disappointment ratio was still an improvement from last quarter (five disappointing results) and from 2Q17 (four disappointing results). Among the underperformers; (i) ARMADA saw lower earnings contribution from its Kraken FPSO as it still has yet to receive its final acceptance, (ii) MHB suffered losses in both of its segments of heavy engineering and marine, and (iii) COASTAL saw lower-than-expected vessel deliveries. As for the outperformers; (i) PCHEM benefited from lower-than-expected taxation, while (ii) PETGAS saw stronger-than-expected earnings contribution from Pengerang RGT.

Maintain NEUTRAL on the sector, for now. Despite the mildly improved round of corporate results, coupled with the improved oil price environment, we still remain cautiously optimistic towards the sector. In fact, the quarter had seen 7 downgraded calls within our sector coverage of 16 counters. Some of the players are still saddled with debt-related issues (e.g. ALAM, ARMADA, SAPNRG), while many are also expected to see a weakened earnings outlook moving forward. Meanwhile, the improved oil price environment has yet to lead to any meaningful uptick in the number or total value of contract job awards, which will only be further hampered by lowered Petronas capex moving forward. For now, we still favour players with strong earnings delivery (e.g. SERBADK, YINSON, DIALOG), with PETGAS being our pick among Petronas-related counters. DAYANG also deserves a mention after securing several Pan-Malaysia MCM contracts of late, thus providing order-book visibility for the next five years, with any positive turnaround in its listed subsidiary PERDANA acting as further catalyst.

Source: Kenanga Research - 3 Sept 2018