MAYBANK Investment Bank Bhd’s views on the oil and gas (O&G) sector in Malaysia remain unchanged, maintaining “tactical positive, selective buys”.
It noted that oil companies responding proactively to their first quarter 2020 (1Q20) weak report cards have slashed their capital expenditures, reduced operating expenditures and cut output to preserve cash.
It sees Petronas taking a similar stance as the fully integrated O&G company joins the Organisation of the Petroleum Exporting Countries plus (OPEC+) group to commit to a 23% output cut from May.
“While the oilfield services are always at the mercy of the oil companies whenever a crisis sets in, we see some standouts like Dialog Group Bhd and Yinson Holdings Bhd as key buys, proven to be resilient in a downcycle,” it said in a research note.
According to the research bank, demand recovery is key to a revival and market rebalancing.
“We opine global consumption in 2Q20 to be the worst. We see 3Q20 as the inflection point as major economies begin to open up.
“While it will likely take about 24 months before demand normalises, we are seeing early signs that indicate demand for petroleum products is beginning to rise globally, particularly in China and the US, and in the road transportation segment, but not the aviation sector yet,” it said.
It also expects oil price (dated Brent) to average below US$40 per barrel in 2020 (as inventories remain high still) and above US$40 per barrel in 2021 (as inventories taper).
Meanwhile, Maybank IB maintains its buy call for Dialog with a target price (TP) of RM3.60, acknowledging that the group’s ability to declare constant dividends, at a 40% payout ratio, “stands out among peers”.
“Optimising its Phase 3 project in Pengerang alone would elevate our sum-of-the-parts (SOTP)-based TP by 64% to RM5.90. Beyond Phase 3, Dialog still has up to 600 acres of onshore land for new development.
“With its proximity to Refinery and Petrochemical Integrated Development (RAPID) and Singapore, and nearby land earmarked for new investment, we believe its strategic location next to international shipping routes is a clear advantage/winner,” it said.
As for Yinson, Maybank IB believes the company is most prepared, given its comprehensive business model orderbook visibility, financial resiliency and management acumen, to ride out the low and volatile oil price.
“Unlike its counterparts, the company remains in contention to win jobs in these uncertain times, which the market has yet to price in. Looking back, Yinson was the least affected by the last downcycle and emerged stronger,” the research bank said.
It maintains Yinson’s buy call with a TP of RM7.20.
“Yinson’s recent foray into renewable energy business via the acquisition of a 37.5% stake in Rising Sun Energy Private Ltd’s solar plant may be minor in value terms (RM32 mil for an effective 52.5 megawatt capacity) but is a major step into sustainability.
“Similar to Yinson’s floating production storage and offloading projects, the company is buying into a brownfield project (derisked construction) with cashflow-certainties (concession-based) and accretive earnings. Yinson is targeting a two gigawatt capacity portfolio in five years,” it added. — May 5, 2020, Bernama
