A read-through of Petronas Group’s 3QFY21 results shows yet another strong set of numbers, driven by higher product prices, and continued recovery from last year’s lows. However, capex spending still remains relatively slow, with YTD capex at RM20.4b (-9% YoY) – approximately half of the group’s full-year capex guidance of RM39-40b for FY2021, or RM40-45b for the next five years (versus FY2020 capex of RM33b). The group largely attributed the slower capex to slower progress and delays in projects following prolonged movement restrictions. The strong set of Petronas results also did not translate to better sector earnings. In fact, in this recently concluded results season, all but three names within our sector coverage have posted disappointing results. Overall, this was largely due to slow job flows amidst continued movement restrictions. With most of the local names being equipment/services providers to Petronas, this was more of a reflection of Petronas’ slow spending instead of its strong earnings. That said, with borders gradually reopening, we see 2022 to be a year of recovery – premised on the work flow resumption after numerous stop-starts over the past two years. We maintain OVERWEIGHT on the sector. Ultimately, with activity levels expected to see a massive recovery in 2022, coupled with the sector still trading at a steep discount, we still see some selective opportunities within the sector. Additionally, recent weakness in Brent crude oil prices is also not too worrying, as we believe current levels will still be more than healthy enough to sustain a recovery in activities. Top picks include DIALOG (OP, TP: RM3.50) and YINSON (OP, TP: RM7.35).

Stronger earnings driven by higher prices. Petronas Group recorded 9MFY21 core PATAMI of RM28b (arrived after adjusting for net impairments) which recovered more than double YoY, predominantly due to the higher average realised product prices (as a comparison, Brent crude prices averaged USD68/barrel versus USD43/barrel for the same period last year), partially offset by the effects of a weakening US Dollar against the Ringgit. The quarter of 3QFY21 recorded a core PATAMI of RM12.3b – jumping 48%/693% QoQ/YoY, similarly thanks to the favourable average realised prices for major products.

Capex spending remains slow. YTD-9MFY21, the group has incurred total capital investments of RM20.4b – lower 9% YoY, with bulk of the capex still in upstream. This is still approximately half of the group’s earlier guidance of RM39-40b capex for FY2021, or RM40-45b capex per annum for the next five years (versus FY2020 capex of RM33b). The group attributed the slow capex due to slower progress and delay in projects following prolonged movement restrictions. As such, assuming the group is still keen on fulfilling its earlier capex guidance, we believe huge spending back-loaded to the 4Q of the year seems necessary. The group is still scheduled to pay in 4QFY21 the remaining RM9b of the total dividend commitment of RM25b for FY2021, although we do not believe this to be a huge bottle-neck considering the group’s net-cash position of ~RM64b.

Strong Petronas results did not translate to corporate earnings. We see a mismatch between the strong set of Petronas’ results against the largely disappointing set of corporate earnings within the oil and gas sector. In this recently concluded results season, all but three names (ARMADA, PCHEM, DIALOG) have reported disappointing earnings. Overall, the quarter was still hit by the ongoing project delays and slow job flows amidst continued movement restrictions. With most of the local names being equipment/services providers to Petronas, this was more of a reflection on Petronas’ slow spending rather than its strong earnings. That said, with borders gradually reopening, we see 2022 to be more of a recovery year – premised on the resumption of projects after numerous stop-starts over the past two years.

Maintain OVERWEIGHT on the sector. Overall, the sector is still trading at a deep discount, with the KLENG index still trading at 2SD below its mean valuations on 2022E. Additionally, we look towards 2022 to be a year of a sector-wide recovery, on the back of activity levels resumption amidst the reopening of borders. We are also not overly worried of the recent weakness in oil prices, as we believe that current levels should be more than healthy enough to drive a recovery in activity levels, with our average Brent crude oil assumption of USD65/barrel in 2022 maintained. Top picks include DIALOG (OP, TP: RM 3.50) and YINSON (OP, TP: RM7.35).

Source: Kenanga Research - 1 Dec 2021