Yesterday, Petronas raised RM6bn after cutting its stakes in MISC, Petronas Dagangan (PetDag) and Petronas Gas (PetGas), with the blocks marketed to Malaysian institutional funds as part of its portfolio management strategy. Macquarie Equities Research (MQ Research) believes this strategy not only provides better financial footing for capex and fiscal stimulus measures for Petronas, but also improves liquidity for illiquid stocks such as MISC. MQ Research has an Outperform rating on Petronas Chem (PCHEM).

Thesis Working Out

MQ Research’s Petronas Monetisation thesis has panned out with the National Oil Company yesterday disposing of RM6bn worth of shares: 5%/6%/10% stakes in its listed subsidiaries MISC, PetDag, and PetGas respectively. At RM7.94/RM22.43/RM15.03 per share respectively, the blocks were sold at discounts of 4%-6% vs the 1-month volume weighted average price (VWAP).

Implications

• Macro: As MQ Research has noted in the past, Petronas’ free cash flow looked tight considering the publicly disclosed FY19E capex and dividend requirements (RM49bn and RM54bn respectively). Moody’s downgrading of Petronas’ rating from A1 to A2 (stable) due to the perceived increased interdependence with the Gulf of Mexico (GoM) did not help matters either. With the disposals, Petronas’ gross gearing will be reduced from 16.4% to 14.9%, and free up some breathing room for its proposed ramp-up in capex over the next two years. By extension, the asset monetisation is incrementally positive to MQ Research’s earlier report, which hinges on effective fiscal stimulus: +7% year on year (y/y) in FY20 (FY19: -2.5%).

• Petronas subsidiaries: MQ Research believes improved liquidity will be the immediate boost for these stocks, particularly for the relatively illiquid MISC. Coupled with the higher free float, there is also potential for higher weightages in benchmark indices. The positives should outweigh short term overhang concerns. For the aforementioned reasons, MQ Research anticipates further disposals are in the cards. Prior, scepticism was high; “Petronas will never let it happen,” is a common pushback that MQ Research has gotten on this thesis. Petronas still holds 64% in PChem (which has underperformed the KLCI by -17% year to date (ytd)) as well as 75% in KLCC real estate investment trust (REIT) and 67% in Malaysia Marine and Heavy Engineering Holdings (MMHE).

Outlook

• Potential for further Petronas Monetisation; stake sales and/or higher dividends, albeit further out. MQ Research has Outperforms on MISC and PCHEM, while it has Neutrals on Petronas Gas and Petronas Dagangan. Trimming holdings in listed subsidiaries could still raise another ~RM18bn.

Source: Macquarie Research - 10 Dec 2019