Serba remains “sell” as UOB Kay Hian Research is neutral on O&G sector

DESPITE global oil prices is currently hovering around US$75/barrel amid a better 4Q 2021 global outlook on the easing of social distancing restrictions, UOB-Kay Hian Research is concerned about setbacks which may contribute to sector earnings risks.

This is chiefly the same recurring themes affecting Petronas since 2019 which may negatively impact sector earnings at least for 3Q 2021.

These issues are higher dividend commitments, another delay in the restart of the Petronas-Aramco co-owned Refining and Petrochemical complex in Pengerang (Johor) and liquefied natural gas (LNG) cargo deferrals from Bintulu due to feed-gas issues.

All-in-all, UOB-Kay Hian Research retained its “market weight” outlook on the oil & gas (O&G) sector given the prevailing earnings risks.

“Our sector valuations remain conservative despite the current high oil price levels given the prevailing earnings risk faced by most O&G stocks which are dependent on local contracts,” opined analyst Kong Ho Meng in a O&G sector update.

“The depressed valuations also potentially reflect an increasing environment, social and governance (ESG) concern on how some O&G counters’ sustainable earnings will adapt to the net-zero carbon emission (NZCE) transition.”

Of the 11 companies under UOB Kay Hian Research’s radar, three are rated “buy”, namely Dialog Group Bhd, Uzma Bhd and Yinson Holdings Bhd.

Another seven companies received “hold” calls with Serba Dinamik Holding Bhd being the only company rated “sell” with a target price of 20 sen (the counter closed unchanged at 34 sen with 27.8 million shares traded at the close of today’s mid-day trading).

The seven companies with a “hold” call are Bumi Armada Bhd, Deleum Bhd, MISC Bhd, Malaysia Marine and Heavy Engineering Holdings Bhd, Petronas Dagangan Bhd, Sapura Energy and Velesto Energy Bhd.

Recall that on Sept 7, AmResearch has retained its “overweight” outlook on the O&G sector with “buy” call on eight O&G stocks under its universe with Serba Dinamik Holdings Bhd being the only counter under a “sell” rating (with its fair value under revision).

The eight companies include Bumi Armada, Dialog Group, Hibiscus Petroleum Bhd, MISC, Petronas Chemicals Group Bhd, Petronas Gas Bhd, Sapura Energy and Yinson.

In essence, UOB Kay Hian Research said it was unable to analyse the recent actual domestic capex split between upstream and downstream production unlike in the previous years as Petronas has yet to publicly release its 2020 annual report.

“Previously, we were expecting local maintenance works to pick up in 2021 as we believe that Petronas must ramp up volumes from the 2020 lows in order to fulfil customer demand,” projected the research house.

“However, despite high oil prices, we see that Petronas is once again facing rising dividend payouts, project delays and under-deliverance of contractual volume (which may force them to make up for it by procuring from expensive spot markets). These cash flow risks may trickle down to more capex deferrals and negative sector earnings surprises.” – Sept 17, 2021

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