Petronas group posted a stronger set of 1Q19 results with core PATAMI of RM12b (+37% QoQ, +16% YoY), driven by higher sales volumes, a weakened Ringgit and lowered costs, but partially offset by lower average realised prices. While no dividends were announced during the quarter, the group had paid RM12b dividends in relation to the RM30b special dividend announced end-FY18, with the remaining RM18b to be paid throughout the rest of the year. Despite so, the group’s cash-pile remains strong at RM172b – almost unchanged from endFY2018. The group had also incurred capex of RM8.3b during the quarter, mainly attributed to upstream projects. That said, we expect capex to increase in the coming quarters given Petronas’ capex commitment of >RM50b for 2019 (versus 2018 capex of RM46.8b). Nonetheless, we feel the group should be able to deliver on its committed higher capex and dividends, underpinned by improved earnings trajectory. We see key beneficiaries of an increased Petronas capex to include fabrication players (e.g. MHB, SAPNRG), drilling players (e.g. VELESTO, SAPNRG), production enhancement players (e.g. UZMA) as well as floating production providers (e.g. MISC, YINSON). Overall, we maintain NEUTRAL on the sector, given limited upside on big-cap Petronas-related counters. Although the recently concluded results season is deemed as largely within expectations, it was mostly due to lowered expectations, rather than fundamental improvement in earnings (average earnings actually declined 27% YoY). Earnings delivery and balance-sheet resilience still remain as our key stock selection criteria, and hence, we continue to favour names such as DIALOG, SERBADK, and YINSON, although we have also highlighted PANTECH and SAPNRG as potential turnaround plays.

Petronas posts stronger 1Q19 results. Petronas group posted 1Q19 core PATAMI of RM12b (after stripping-off net impairment write-backs), growing 16% YoY, helped by higher sales volume for petroleum products and LNG, on top of benefiting from the weakening Ringgit, but offset by lower average realised prices. Sequentially, the quarter’s core PATAMI grew 37% QoQ, mainly due to lower production costs (gross margin +4.3 ppt), on top of lower finance costs (-39%) and fixed overhead savings (-8%). This is despite poorer revenue (-11%), dragged by lower sales volumes and average realised prices, on top of a stronger Ringgit, QoQ.

Cash-pile remains strong. During the quarter, the group paid RM12b of dividends, in relation to the RM30b special dividend declared in end-FY18, with the remaining RM18b to be paid throughout the year, although seemingly no dividends were declared this quarter. Despite so, Petronas’ cashpile remains strong at RM172b – almost unchanged from end-FY18. The group had also incurred capex of RM8.3b during the quarter (-31% YoY, -59% QoQ), mainly attributed to upstream projects. With the group having already committed to higher capex of >RM50b for 2019 (versus 2018 capex of RM46.8b), we believe higher spending would come in the coming quarters, with focus on the upstream. Nonetheless, with Petronas’ improved earnings trajectory, we believe the group should be able to deliver on its committed higher capex even despite higher dividend payments for the year.

Value-chains to benefit from higher Petronas capex. We believe the higher capex, especially in the upstream space, could be sanctioned for fields under development (e.g. Kelidang, Limbayong), as well as production enhancement for existing brownfields. As such, we see potential beneficiaries of a higher Petronas capex spend to include fabrication players (e.g. SAPNRG, MHB), drilling players (e.g. VELESTO, SAPNRG), production enhancement players (e.g. UZMA), as well as floating production providers (e.g. MISC, YINSON). Nonetheless, cost optimisation would still remain as a key factor, and hence, we should continue to expect competitively lower margins for upcoming job awards.

Maintain NEUTRAL, given limited upsides to big-cap Petronas-linked counters. While we deem the recently-concluded results season to be largely in line of expectations, with only 4 out of 13 coverage stocks posting below-expectation earnings (implying a “disappointment” ratio of 31%), this was mostly due to lowered expectations, rather than an actual improvement in fundamental earnings. In fact, the sector saw an average earnings decline of 27% YoY, signalling the continued challenging business environment. Nonetheless, oil prices have managed to stabilise in recent months, on the back of continued OPEC+ cut compliance on top of involuntary output drops in countries such as Venezuela, Libya and Iran, although recent U.S-China trade tensions have seemingly spurred some demand-side uncertainties. That said, we firmly view that continued production cuts from OPEC+ beyond the current June 2019 cut-off date is paramount to sustaining current oil price levels. Overall, with earnings delivery and balance-sheet resilience still remaining as our key selection criteria, we continue to favour stable names such as DIALOG, SERBADK and YINSON, although we have also highlighted PANTECH and SAPNRG as potential turnaround plays.

Source: Kenanga Research - 3 Jun 2019