Read-through of Petronas’ FY19 results - earnings came in weaker, dragged by lower average realised prices. As expected, the group also declared lower dividends of RM24b for 2020, as compared to RM54b paid in 2019 consisting of RM30b special dividends and RM24b of ordinary dividends. FY19 capex of RM47.8b was slightly higher than 2018 (+2%), with most of it attributed for local upstream projects, as opposed to downstream in prior years. Moving forward, we expect capex to remain flattish at these levels as Petronas guides a capex budget of below RM50b, although with increased focus in local projects. Meanwhile, the group also maintains a bearish outlook on the oil and gas industry, citing macro external factors such as ongoing geopolitical uncertainties, prolonged trade tensions, and near-term demand disruptions from the Covid-19 outbreak to negatively impact its FY20 financial performance. We believe this could translate to added margins pressure for local-centric equipment and services providers (e.g. DAYANG, UZMA, VELESTO) as cost optimisation would be given increased importance, although hopefully, this can be partially mitigated by the sustained levels of jobs flow, as guided in Petronas’ Outlook Activity. Maintain NEUTRAL on the sector, given the uncertainties, while adopting a more prudent approach to our stock selection – favouring names that can provide a degree of defensiveness on top of earnings growth delivery. As such, we have arrived at our preferred picks of SERBADK and YINSON, although MISC also deserve a noteworthy mention given its consistent dividend pay-outs as a blue-chip counter.

Petronas posts weaker results. Petronas group posted FY19 core PATAMI of RM40.2b (arrived after stripping-off net impairments), representing a 7% decline YoY, mainly due to the impact of lower average realised prices, while partially offset by the weakening Ringgit, higher sales volume for petroleum products and LNG, and lower tax expenses. For 4QFY19, core PATAMI of RM7.1b also represents a 19% decline YoY, dragged by aforementioned similar reasons of lower average realised prices, partially offset by higher sales volume for petroleum products, and crude oil and condensates, coupled with lower tax expenses. Sequentially, although revenue improved QoQ (+16%), thanks to higher sales volume for crude oil and condensates and LNG, core PATAMI still declined 16% QoQ, dragged by the higher tax expenses.

Lower dividends and capex. In FY19, Petronas paid a total of RM54b of dividends to the federal government – consisting of RM24b ordinary dividends, as well as RM30b special dividend as proposed in the Budget 2019. As expected, Petronas will not be continuing its payments of the special dividend for FY20, having declared only the ordinary dividends of RM24b. Meanwhile, Petronas also incurred FY19 total capex of RM47.8b (+2% YoY), with a large portion of it being back loaded into 4QFY19 as the quarter saw capex of RM18.8b. Most of the capex incurred were into local upstream projects, as opposed to downstream in prior years. Moving forward, expect capex to remain flattish as the group guides forward capex to be capped below the RM50b-mark, although with increased focus in local projects.

Petronas bearish on oil and gas outlook. The group maintains that outlook for the oil and gas sector remains bearish, given the ongoing geopolitical uncertainties, prolonged trade tensions and near-term demand disruptions due to the Covid-19 outbreak. As such, all these factors are expected to negatively impact financial performance for 2020. Although Petronas’ balance sheet still remains robust with a net-cash of RM81.6b, the capped capex spending, coupled with a bearish earnings view lead us to believe that cost optimisation would be given increased importance moving forward. We believe this could translate into additional margin pressures for local-centric equipment and services providers (e.g. DAYANG, UZMA, VELESTO), although hopefully this could be partially mitigated by the sustained level of jobs flow, as guided in Petronas’ Activity Outlook.

Maintain NEUTRAL on the sector. Given the uncertainty surrounding outlook of the sector, we would adopt a more prudent approach to our stock selection, favouring names which can provide investors with some degree of defensiveness, while continuing to deliver robust earnings growth amidst the challenging landscape. With these criteria, our preferred picks include: (i) SERBADK, given its consistent track record of earnings growth delivery, and (ii) YINSON, with its long-term contract nature in the FPSO business providing earnings resilience. MISC is also a noteworthy mention given its consistent dividend pay-outs (yielding ~4%) as a blue chip counter to provide some degree of defensiveness.

Source: Kenanga Research - 27 Feb 2020