A read-through of Petronas Group’s financial results shows an overall improvement in numbers, led by favourable product prices, recovering from lows last year. In tandem with this, the group has agreed to increase its FY21 dividends to the government by an additional RM7b to RM25b, from its previous commitment of RM18b. Nonetheless, this is still far below the RM54b and RM34b dividends Petronas paid in 2019 and 2020, respectively. Its current balance sheet (net-cash of RM60b) should be able to stomach this increased dividend commitments. Meanwhile, capex spending has been slower, with 1HFY21 of RM14.8b (-14% YoY), as the prolonged movement restrictions had made capital investments difficult. Petronas is still looking for FY21 capex to reach ~RM40b (in-line with earlier guidance of RM40-45b capex per year for the next five years), and as such, we believe capex spending could be backloaded towards later parts of the year. That said, portion of upstream spending was reduced to 42% (from 53% in 1HFY20), and we see this trend of gradually scaling back upstream spending to likely continue as the group might seek to divert some of its investments into other renewable energy sectors in efforts to keep up with the current energy transition trend. Overall, considering Petronas’ increased dividend commitment, and continuing increased commitments towards renewable energy, we believe Petronas prudency to costs and spending will likely remain. As such, we believe this could lead to a slower recovery for local-centric contractors (e.g. VELESTO, DAYANG, UZMA). Realistically, we do not expect activity levels to revert back to pre-pandemic levels before 2023. As such, in order to see sustainable growth, we believe that these players would need to increase competencies to compete overseas, and/or expand their services into other sectors of energy in order to future-proof their portfolio. Maintain NEUTRAL, given the gradual recovery as the sector’s fundamentals still largely remain largely weak, with a long-term oil price outlook of USD55-60 per barrel.

Stronger financial performances driven by higher prices. Petronas recorded 1HFY21 core PATAMI of RM15,772m (arrived after adjusting for net impairments) – representing an 81% bounce YoY, largely driven by favourable prices for petroleum products, crude oil and condensates coupled with higher sales volume for LNG and sales gas. For the quarter of 2QFY21, core PATAMI of RM8,266m was a YoY turnaround from losses, similarly driven by higher average realised prices for major products. Meanwhile, QoQ, the quarter also saw a 10% increase in core PATAMI from improved realised prices for all products.

Increasing dividend commitments. More notably, on the back of the recovery, Petronas has agreed to increase its FY21 dividend commitment by RM7b to RM25b, from RM18b initially, assisting the government in combating the current Covid-19 pandemic. Nonetheless, this is still below the RM34b paid in 2020, and far below the RM54b in 2019. Looking at the group’s balance sheet, we believe it should be able to stomach this increase in dividend commitment given its current net-cash position of RM59.6b (up slightly from RM55b last quarter) – although we note that this is almost half from two years ago with RM117b as at end-2019.

Capex spending target to remain. In 1HFY21, Petronas’ capex spending had fallen 14% YoY from RM14.8b to RM12.7b, as the prolonged movement restrictions had made capital investments difficult. Upstream spending still remains the largest portion of the group’s capex at 42%, although this was lower YoY compared to 53% in 1HFY20. We see this trend of gradually scaling back upstream spending to continue, as the group might seek to divert its investments into other renewable energy sector in efforts to keep up with the current energy transition pressures. Overall, the group still sees its FY21 capex to reach ~RM40b. This is the lower-end of its capex guidance of RM40-45b per annum over the next five years, but nonetheless, still represents a huge improvement from RM33b in 2020 (as a comparison, in the five years prior to 2020, Petronas’ capex had ranged between RM45b to RM65b). Considering the movement restrictions and rising Covid-19 cases, we believe capex spending could be backloaded towards the later part of the year in order for the group to reach its FY21 capex spending target.

Slow recovery to local contractors. Considering Petronas’ increased dividend commitment, and increased commitments to renewable energy, we believe Petronas will continue to be prudent in its spending and cost measures. As such, we believe this could lead to a slower recovery and job flows especially for local-centric contractors (e.g. VELESTO, DAYANG, UZMA). Realistically, we do not see activity levels to revert back to pre-pandemic levels any time before 2023. As such, in order to see sustainable growth, we believe that these players would need to increase competencies to compete overseas, and/or expand their services into other sectors of energy in order to future-proof their portfolio.

Maintain NEUTRAL. While the recent rebound in oil prices is a welcomed positive, sector’s fundamentals remain largely weak. Furthermore, outlook for product prices (e.g. crude oil, petrochemicals) are expected to normalise starting 2H 2021 and beyond. In line with this, Petronas is also expecting long-term crude oil prices to hover between USD55-60 per barrel, down from the current levels of ~USD70/barrel.

For stock picks, we see value emerging in DIALOG (OP, TP: RM3.50) and YINSON (OP, TP: RM6.00) given recent share price weakness. These names have proven resiliency, and are backed by strong and capable management.

Source: Kenanga Research - 30 Aug 2021