Malaysia Oil & Gas. Malaysia Industry Focus. Turning positive. DBS Group Research. Equity 17 Jan 2018 KLCI : 1,826.03

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1 Malaysia Industry Focus Refer to important disclosures at the end of this report DBS Group Research. Equity 17 Jan 2018 Turning positive Healthier 2018 outlook; Brent crude oil price stays above USD60/bbl mark Development along value chain; sign of recovery in global capex spending by oil majors but Malaysian job flows will continue to be lacklustre Prefer stocks with exposure to production activities and/or overseas footprint Top picks Hibiscus, Bumi Armada and Wah Seong Brent crude oil price has breached key psychological mark of US$60/bbl. We are turning optimistic on the direction of oil prices, and our average Brent crude oil price forecast for 2018 stands at US$60-65 per barrel (bbl). This is supported by robust oil consumption demand, which coupled with OPEC s adherence to production cuts and extension of the production cuts until end-2018 has led to steady global inventory drawdowns. This is a promising signal as far as market rebalancing is concerned and will continue to support a positive oil price trajectory hereon, as long as the supply side is wilfully capped by market participants. Better contract flows in 2018.Global capex budgets are expected to remain resilient in 2018 and accelerate in 2019 albeit from a low base as oil price averages to the US$65/bbl mark. Already, we are seeing signs of recovery along the value chain in 2018 for global offshore activities. Oil and gas service providers with regional or global footprint are well poised to capitalise on this trend. That said, Petronas Activity Outlook report paints a more sombre picture in Malaysia despite improving tenders and awards in 2017, mainly driven by Pan Malaysian contract awards (+63% y-o-y). Going forward, we expect local project flows to remain challenging albeit a few bright spots in marine vessels, offshore installations and fabrication. Prefer stocks with exposure to production activities and overseas footprint. Although oil & gas stocks with exposure to exploration and development activities offer the greatest operational leverage when capex cycle improves, we prefer stocks with exposure to production activities which offer better earnings visibility at this nascent stage of recovery. We also favour stocks with global or regional footprints which have better job prospects compared to pure Malaysian-based players. Our top picks are Hibiscus Petroleum which is the best Malaysian listed proxy to rising oil prices, Bumi Armada which will see more tender activities for floating, production, storage and offloading (FPSO) vessels on the horizon and Wah Seong whose earnings are secured by Nord Stream 2 pipe-coating job. We also have buy calls for Sapura Energy which is a largecap Malaysian proxy to rising oil prices, Serba Dinamik which focuses on resilient operation & maintenance (O&M) activities and Pantech which benefits from rising demand for pipes, valves and fittings in RAPID. KLCI : 1, Analyst Inani Rozidin inanirozidin@alliancedbs.com STOCKS 12-mth Price Mkt Cap Target Price Performance (%) RM US$m RM 3 mth 12 mth Rating Sapura Energy , (42.9) (50.0) BUY Bumi Armada , BUY Serba Dinamik , N.A BUY Hibiscus Petroleum BUY Wah Seong Corp BUY Pantech Group (6.4) 40.4 BUY Dialog Group Bhd , HOLD Source: AllianceDBS, Bloomberg Finance L.P. Closing price as of 16 Jan 2018 Sapura Energy :Integrated global O&G services provider with full spectrum of capabilities across the O&G value chain Bumi Armada :International oil & gas service provider specialising in FPSO, offshore support vessels and transport and installation services. It is the fifth largest FPSO player in the world and an established OSV owner and operator, with extensive experience acr Serba Dinamik Holdings :Serba Dinamik is an energy services group that provides engineering solutions to the oil and gas (O&G) and power generation industries. It has presence in Malaysia, Indonesia, Qatar, UAE, KSA, Oman, Bahrain, India and Turkmenistan. Hibiscus Petroleum Berhad :Hibiscus Petroleum is Malaysia s first listed independent oil & gas exploration and production company. Its key activities are focused on growing its portfolio in the UK, Malaysia and Australia. Wah Seong Corp :WSC is a globally integrated energy infrastructure group. Its Oil&Gas division provides specialized pipe coating services and EPCC specialities. Meanwhile, its industrial services division is involved in renewable energy and infrastructure materials. Pantech Group :Pantech trades and manufactures steel pipes, valves and fittings largely for the oil & gas onshore and offshore industry. Dialog Group Bhd :Integrated specialist technical services provider for the oil, gas and petrochemical industry with long-term recurring income from tank terminal business ed: JS / sa:bc, PY, CS

2 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Industry Focus Crude oil price rebound Brent crude oil price has breached the key psychological mark of US$60/bbl. The average Brent crude oil price in 2017 was c.21% y-o-y higher atus$54.7/bbl. We are turning optimistic on the direction of oil prices, and our average Brent crude oil price forecast for 2018 stands at US$60-65/bbl. This is supported by robust oil consumption demand, which coupled with OPEC s adherence to production cuts and extension of the production cuts until end 2018 has led to steady global inventory drawdowns. According to OPEC estimates, global inventories have fallen from 280 million barrels (mmbbls) above the five-year average in May 2017 to 140mmbbls above the five-year average in Oct OPEC production levels lower in 2017 mmbpd Source: Bloomberg Finance L.P., AllianceDBS WTI and Brent price trend USD/bbl IEA world oil production mmbpd mmbpd WTI Source: Bloomberg Finance LP, AllianceDBS BRENT OPEC members showed decent compliance to production cuts in The OPEC countries involved in the production cuts adhered closely to the agreed production cuts in 2017, though the story has not been as smooth on the export front, where Saudi efforts to cut exports have been undermined to a certain extent by Iraq expanding its export capacity and Iran s impending nuclear deal and alleged relationship with extremists in Yemen which has raised concerns globally. To recall, in a landmark decision on 30 November 2016, OPEC and non-opec countries had jointly agreed to cut production by about 1.8m barrels per day (mmbpd) from October 2016 reference levels for a 6-month period over January-June 2017, in an attempt to balance the oil market. This was further extended to end-2018 in the last OPEC general meeting, as US shale production staged a recovery since end-2016 and risked inundating the market again. We believe however the production cuts have filtered better into export cuts by 2H17. IEA total oil production IEA total crude oil production - OPEC Source: OPEC Monthly Oil Market Report (MOMR), IEA, AllianceDBS Extending production cuts to end OPEC and non-opec oil producers agreed on 30 Nov 2017 during a meeting in Vienna to extend the current agreement of cutting oil output by 1.8mmbpd to end The decision was taken amid unprecedented unanimity between Saudi Arabia and Russia, two of the world s largest oil producers. The deal also places production caps for the first time on Nigeria and Libya, which were exempt from the cuts and this had resulted in an unexpected supply glut in the early part of Thus, fewer supply side surprises are expected from the OPEC and non-opec bloc in OPEC and IEA have diverging views. OPEC and Russia eliminated almost two-thirds of the global glut in 2017 as the former rivals jointly restricted their crude production to offset a boom in US shale oil. At the heart of the clash between market expectations in 2018 is whether the alliance can deplete the rest of the overhang without triggering a new flood of American shale. Both the IEA and OPEC agree that the coalition cuts are working this has been evident in reducing world crude oil stocks. Page 2

3 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18* 2Q18* 3Q18* 4Q18* Industry Focus Where they diverge is on what happens next. OPEC predicts rebalancing will complete by late In contrast, the IEA sees inventories remaining steady as new supply growth surpasses gains in demand. Although both institutions project that demand for OPEC crude will be about 32.3mmbpd on average in 1H2018, their views had drifted apart as 2017 progressed. OPEC expects it will need to pump about 34mmbpd in 2H2018, while the IEA sees a requirement of just 32.7mmbpd. World oil demand vs supply mbpd World oil supply World oil demand Source: OPEC Monthly Oil Market Report (MOMR), IEA, AllianceDBS *OPEC estimates Inventory drawdowns will continue to support oil price. Market sentiment improved in 2017 and global inventory drawdowns as evidenced by OECD world inventory numbers picked up in 2H17. Inventory declined and normalised steadily in 2017 as opposed to inventory buildup in 2016, and the latest world commercial oil inventory reading of 2,948 mmbbls as of end-october 2017 is 3% lower than the corresponding number in OECD world commercial oil stocks fell by 37.3 mmbbls for the third consecutive month in October Within the components, crude and product stocks fell by 11.4 mmbbls and 25.9 mmbbls m-o-m respectively. By regions, OECD Americas fell by 44.1 mmbbls, while OECD Europe and OECD Asia Pacific rose by 5.3 mmbbls and 1.5 mmbbls, respectively. It should be noted that the stock surplus had reduced by 16 mmbbls from a month earlier and by 202 mmbbls from January This is a promising signal as far as market rebalancing is concerned and will continue to support a positive oil price trajectory hereon, as long as the supply side is wilfully capped by market participants. Shale limits. There are signs that the US shale boom is slowing. Drillers may have reached the limits in terms of cutting costs and boosting productivity, and investors are finally insisting that profits are shared out rather than funnelled back into supply growth. However, IEA believes OPEC continues to underestimate the magnitude of the shale revolution. According to Bloomberg New Energy Finance, American producers are rushing to lock in revenues as WTI stabilises at USD60/bbl, enabling them to finance a new wave of drilling. The possible resurgence of US shale drilling will continue to pose a threat to OPEC and non- OPEC rebalancing efforts. OECD world crude oil inventory mb 3,200 3,100 3,000 2,900 2,800 2,700 2,600 2,500 2,400 2,300 2,200 OECD world commercial oil stocks (LHS) Source: OPEC Monthly Oil Market Report (MOMR),IEA, AllianceDBS US crude oil inventory mmbbls Source: Bloomberg Finance L.P, AllianceDBS mb 1,900 1,800 1,700 1,600 1,500 1,400 1,300 1,200 1,100 OECD world crude oil stocks (RHS) Page 3

4 Sign of recovery in global capex spending Signs of improvement along the value chain. Global capex budgets for upstream activities have been cut substantially since the onset of the oil price collapse in Capex budgets for 2015 and 2016 were slashed by an average of about 25% each year. However, a 53% upswing in US shale investment and resilient spending in large producing regions like the Middle East and Russia led nominal upstream investment to bounce back by 6% in Spending is also rising in Mexico following a very successful offshore bid round in Global upstream capex budgets are expected to remain resilient in 2018 and accelerate in Already, we are seeing nascent signs of recovery along the value chain in 2018 for offshore activities more active tenders, rebound in asset utilisation such as jack-up rigs and offshore support vessels (OSV), and higher enquiries for global production related platforms. According to Rystad Energy DCube (Dec 2017), total global offshore capex is expected to bottom out in 2018 and will progressively improve from Global upstream capex trend USD'bn Source: OECD/IEA Global offshore capex trend USD'bn Source: Rystad Energy Dcube (Dec 2017) Shallow Deep water Ultra deepwater Total Current under-investment trend points to longer-term price normalisation. We believe capex cuts in will pave the way for higher oil prices in the longer term. The final investment decisions (FIDs) on 68 large projects globally totalling USD380bn in capital expenditures were deferred since crude prices started to plunge in 2014, according to a report by research and consultancy firm Wood Mackenzie. These deferrals and capex cuts will not necessarily translate into significantly lower production in the near term as most productive projects will likely go ahead. The Wood Mackenzie report finds that the FIDs on many of the projects have been pushed back with production start-ups slated for By 2021, deferred liquids volumes will reach 1.5 mmbpd, Wood Mackenzie projects, rising sharply to 2.9 mmbpd by The impact on supply is thus, more acutely felt in the medium term as it typically takes 5-7 years to bring a greenfield conventional project into commercial production. Capex outlook in Malaysia remains lacklustre Sombre picture from Petronas Activity Outlook Petronas signals monotonous demand growth for majority of its upstream services over the next three years ( ). Cost optimisation remains a top priority despite the recent recovery in the price of crude oil. Petronas said in its Activity Outlook report that the requirement for jack-up rigs used in exploration and development activities will be raised marginally to 7-10 rigs in 2018 as compared to 6-9 rigs in its earlier Activity Outlook report. This is half of the peak of20 rigs during Demand for jack-up rigs over the medium term (post 2020) will likely remain stable at current level. Bright spots are increased demand for wellhead platforms (WHP) and heavylift barge for the installation of these WHP not only in 2018 but also over the medium term. But this is at the expense of demand for central processing platforms (CPP) as Petronas remains prudent in its spending and prefer to opt for WHP with tie-in to existing nearby facilities. Within the offshore support vessels (OSV) space, demand for fast crew boats will pick up as it is a more cost effective means of transport as compared to choppers. Besides that, overall activity plans remain largely unchanged from the previous activity outlook report for Some of the works meant for 2017/2018 have likely been deferred to the 2018/2019 horizon. Given that the local industry (with >2k vendors and suppliers) is still seeing overcapacity, only selective oil & gas service providers will benefit from the new contracts, which will at best allow them to replenish their existing orderbooks. Page 4

5 In the local fabrication space, we view Sapura Energy and Malaysia Marine and Heavy Engineering (MMHE) to be the key players to secure more new fabrication contracts. UMW Oil & Gas (UMWOG) is a key beneficiary to meet Petronas local jack-up rig requirements. For OSVs, players like Icon Offshore and Alam Maritim could benefit to some extent from slightly higher marine vessel demand. Marine vessels include anchor handling tug supply vessels (AHTS), platform supply vessels (PSV), and fast crew boats (FCB). Local topside maintenance contractors such as Sapura Energy, Dayang, Deleum, Carimin, and Petra Energy could benefit from the increased requirements for topside maintenance namely 1) man-hours, Petronas Activity Outlook ) maintenance, construction and modification (MCM), and 3) hook-up commissioning (HUC) works. In downstream activity, the number of man-hours required for plant turnaround has been trimmed by 9%/48% for 2018/2019 to 4.3m/3.5m man hours. Nonetheless, the medium term outlook (post 2020) is positive with anticipated substantial increase in turnaround activity to cater for Pengerang Integrated Complex (PIC), due to the large size of its operations. PIC project is scheduled to come online by 2019, and turnaround activities will kick-start around 2022 onwards. Dialog and Serba Dinamik are key beneficiaries of higher demand for plant maintenance. New hydrocarbon projects Greenfield projects Brownfield projects Upstream activity (by category) Outlook c.20 (30% oil projects) c.30 (75% oil projects) Outlook 2018 Outlook 2018 Outlook Medium Term Outlook (post 2020) Activity phase Key listed beneficiaries Sapura Energy, MMHE Medium Term Outlook (post 2020) Activity phase Sapura Energy, Deleum, Scomi, Uzma Key listed beneficiaries Drilling Rigs & HWUs Offshore Fabrications Linepipes (Rigid) Offshore Installations HUC & MCM Floating Offshore Facilities Marine Vessels Downstream activity Plant turnaround (No. of man-hours) 7-10 Jackup rigs 6-9 Jackup rigs Exploration, 2-3 TADRs 2 TADRs development, UMWOG, Perisai production 3 HWUs N/A WHPs 8-10 WHPs Development Sapura Energy, MMHE 1 CPP 2 CPPs km N/A Carbon Steel Development Wah Seong 40km Corrosion N/A Resistant Alloy 2-3 projects for 2 projects for heavylift barge heavylift barge Sapura Energy, Alam, Development 1-2 projects for 1 project for Barakah pipelay barge pipelay barge 4m man-hours for 2-3m man-hours Sapura Energy, Dayang, HUC for HUC Development and production Deleum, Carimin, Petra Energy 15m man-hours for MCM Note: Refer to page 10 for abbreviations used Source: Petronas 10-12m manhours for MCM 1 Aframax FSO 1 FPSO Development MISC, Yinson vessels for AHTS >100MT vessels for AHTS >100MT 46 vessels for vessels for AHTS=<100MT AHTS=<100MT vessels for vessels for PSVs/SSVs PSVs/SSVs vessels for vessels for FCBs FCBs Outlook Outlook m m m N/A Medium Term Outlook (post 2020) Exploration, development, production Activity phase Icon Offshore, Alam Maritim, Nam Cheong, Perdana Key listed beneficiaries Operations Dialog, Serba Dinamik Page 5

6 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 Industry Focus Petronas quarterly capex RM'bn Source: Petronas 6.4 Domestic Better global contract flow in New tenders and contracts secured by Malaysian listed oil & gas service providers have improved over 2017(+63% y-o-y), mainly driven by the Pan Malaysian contract awards. However, Pan Malaysia is an umbrella contract similar to a letter of undertaking with specified budget and time frame. With the previous umbrella contract expired in 2016, the awards in 2017 are akin to contract renewals for the incumbents. Excluding Pan Malaysia awards, 2017 contract wins grew by 54% y-o-y with equal distribution from local and overseas contributions (local contracts grew by 70% y-o-y and overseas contract grew by 41% y-o-y). Going forward, we expect local jobflows to remain challenging albeit a few bright spots in marine vessels, offshore installations and fabrication. Nonetheless, we expect the growth momentum to continue in 2018 reinforced by more active bidding for new jobs currently taking place in the global market given the improved conditions. Malaysia O&G contract flow RM'm ,539 4, , , ,189 3,833 2,239 1,601 1,716 International 16,242 16,082 14,512 8,526 4,484 11,570 5,538 2,317 7,983 4,202 2,948 3,187 1,491 5,988 2, ,168 5,919 2,180 Earnings prospects improving from a low base Selective earnings rebound in Excluding Sapura Energy, all stocks under our coverage reported stronger earnings growth in CY2017. We expect this momentum to continue in CY2018, supported by 1) higher demand from improved market sentiment on the back of a recovery in oil prices, 2) improvement in upstream activities leading to more contract flows, and 3) further development in the refinery and petrochemical integrated development (RAPID) projects. Although Sapura Energy is expected to be loss making in FY18 (FYE Jan), we believe recent share price weakness has priced in such negatives. Earnings prospect from FY19 should improve, supported by its exploration and construction (E&C) segment which will offset its loss making drilling segment. In addition, potential better-than-expected job flows given the improved oil prices could further boost its future prospect. Fully diluted core EPS (sen) Stock CY2016 CY2017F CY2018F CY2019F Sapura Energy Bumi Armada Serba Dinamik Hibiscus Petroleum Wah Seong Pantech Dialog Source: Company, AllianceDBS Fully diluted core EPS growth (% y-o-y) Stock CY2016 CY2017F CY2018F CY2019F Sapura Energy 121% -229% 184% 184% Bumi Armada -120% 688% 41% 13% Serba Dinamik 61% 21% 26% 23% Hibiscus Petroleum 49% 179% 146% 44% Wah Seong -203% 461% 47% 4% Pantech -22% 42% 17% 8% Dialog 13% 13% 10% 16% Source: Company, AllianceDBS Malaysia contract (RM'm) Overseas contract (RM'm) Total Source: Bursa Malaysia, AllianceDBS Page 6

7 Key risks Inability to finance new projects. Oil & gas companies may face difficulties in securing debt funding to undertake new projects, no thanks to the sector s challenging operating conditions and recent high default rates. In our stock universe, we note that net gearing levels for the majority of stocks are at healthy levels except for Sapura Energy, Bumi Armada and Wah Seong. That said, we believe the net gearing for Wah Seong and Bumi Armada will improve steadily going forward. Financial health Stock Net gearing Current EBITDA / ratio interest Sapura Energy 1.26x 1.06x 3.1x Bumi Armada 1.84x 1.04x 6.4x Serba Dinamik 0.25x 1.87x 9.7x Hibiscus Petroleum nm 1.01x 7.4x Wah Seong 1.00x 1.06x 6.9x Pantech 0.21x 2.39x 8.8x Dialog nm 1.51x 14.3x Note: Net gearing and current ratio are based on latest financial quarter while EBITDA/interest is based on latest financial year Source: AllianceDBS Slower than expected contract flow. Majority of local oil and gas players are anticipating improved contract awards in 2018, which is a re-rating catalyst and should help swing earnings to the black. Delay in contract awards is detrimental to the local oil and gas industry. Vulnerable to weakening of oil price. Local oil and gas players earnings are directly or indirectly correlated to oil prices. This makes it susceptible to oil price volatility. Volatility in USD exchange rate. Any further strengthening of MYR would negatively affect earnings of some players as majority of sales are denominated in USD. A stronger MYR to USD will lower its absolute revenue in MYR, and as such lower its earnings. Wah Seong : The company is seeking to divest non-core assets to lower its gearing level and generate cashflow for working capital. This will put Wah Seong in a better position to undertake more projects going forward. Bumi Armada: We expect its operating cash flow to improve from FY17 onwards, with three FPSOs coming onstream that should progressively reduce its gearing level. To lower its debt commitment, management will look for JV partnership for new FPSO projects going forward. Sapura Energy: We expect its net gearing level to remain at the current level with the group planning for capex on maintenance and development of gas fields to the tune of c.rm800m per annum. The capex will be funded by internally generated cash. Page 7

8 Valuation & Stock Picks Hibiscus Petroleum (BUY; TP: RM1.45) is a pure oil & gas exploration and production player. As such, it is the best Malaysian-listed proxy to rising oil prices. The completion of the acquisition of Anasuria Cluster in Mar 2016 had led a turnaround from a core net loss of RM145m in FY16 (FYE Jun) to core net profit of RM29m in FY17. The impending completion of the acquisition of North Sabah EOR PSC, estimated by end 1QCY18, will more than double its earnings in FY19. Recent enhancement works on Anasuria Cluster and oil price rebound are further icings on the cake which gives strong support to our core EPS (fully diluted) CAGR of 29% from FY17-20F. Bumi Armada (BUY; TP: RM0.95) is attractive at its current valuation which has priced in most negatives. The lossmaking OSV segment should improve going forward as its utilisation rate has stabilised at 53% in 3Q17 while OSVto-rig ratios should improve in 2018, supported by improvements in the global working rig count which will drive a recovery in OSV utilisation and day rates. Its FPSO business should also see better days ahead following the deployment of Armada Olombendo and Kraken FPSO. The eventual full production ramp-up by Kraken FPSO in 1H18 should further re-rate this stock. Further, we are also seeing more new tender activities for FPSO, which is positive for Bumi Armada. Wah Seong (BUY; TP RM1.90) is poised for an earnings rebound after two years in the doldrums due to the collapse in crude oil prices and dwindling order book. The turnaround was set in motion following the award of a EUR600m (RM3bn) pipe-coating job for the Nord Stream 2 (NS2) project. On the back of a total orderbook of RM3.5bn, we forecast an EPS CAGR of 23% for FY17- FY19F. We like Wah Seong as its earnings are secured until end Moreover, with more stable crude oil prices, demand for pipe-coating and engineering services for the oil & gas sector should improve going forward. Sapura Energy (BUY; TP: RM1.35) is expected to close FY18 (FYE Jan) at a loss, mainly dragged by its drilling segment. While we believe the operating environment remains challenging, we do see some room for improvement in FY19, particularly in the engineering and construction (E&C) segment. Sapura Energy s orderbook stood at RM15.1bn as at end-3qfy18, which will provide earnings visibility until FY20.Following the recovery in oil prices, we expect more jobs to filter through from FY19 onwards as the capex spending cycle in the industry has bottomed. New tenders and contracts improved during CY2017, mainly driven by Pan Malaysia contract awards. We expect this growth momentum to continue in 2018 on more active bidding for new jobs in the market given the improved conditions. Serba Dinamik (BUY; TP RM3.60) s focus on O&M activities that have proven to be resilient even during the low crude oil price environment. Serba s geographical diversification also mitigates geopolitical risks. We conservatively forecast Serba s EPS CAGR at 23% over FY16-FY19F, underpinned by increased demand for O&M services as oil prices recover and stabilise, which would result in higher activity levels across the O&G and powergeneration industries. Pantech (BUY; TP: RM0.85) s earnings rebound momentum should persist in 2HFY18 (FYE Feb), underpinned by more orders from RAPID. Pantech has a dominant local market share of 40% in the supply of pipes, valves and fittings (PVF). Coupled with its move to set up a warehouse in Pengerang and a galvanising plant in Tanjung Langsat, we believe Pantech is well positioned to benefit from more RAPID orders. Beyond strong organic growth, Pantech is also on a lookout for earnings accretive M&As given its strong balance sheet. Its valuation is attractive at 10x FY18F FD EPS. Pantech also offers one of the highest dividend yields in our oil & gas universe at c.5%. Dialog (HOLD; TP: RM2.40) is set to strengthen its longterm recurring income business through its tank terminal expansion in Pengerang Deepwater Terminal (PDT) within Pengerang Integrated Petroleum Complex (PIPC). Its longterm expansion progress is promising and we see huge potential in the overall Petronas RAPID project, as it is set to become a regional downstream oil storage and trading hub. Furthermore, we foresee positive developments in the upstream segment in light of the stabilisation of global crude oil prices and eventual recovery of oil majors capex cycle. However, we think that these developments are already reflected in the share price. As such, Dialog s share price is expected to hover at this level for now due to lack of catalysts. The next re-rating catalyst for Dialog will be announcements of new projects beyond Pengerang Phase 1 and 2. Page 8

9 Peers comparison (as at 12 Jan 2018) Call Target Price (LC) Current Price (LC) Mkt Cap (RM m) EPS (FD) Growth (YoY) CY2018 CY2019 CY2018 CY2019 CY2018 CY2018 CY2018 CY2018 Dialog Group HOLD , % 13% 34x 30x 4.3x 1% 12% 0.1x -40% -53% Sapura Energy* BUY , % -121% 40x 14x 0.4x 0% 1% 0.1x 79% 76% Bumi Armada* BUY , % 705% 9x 8x 0.8x 3% 9% 0.1x 95% 94% Serba Dinamik* BUY , % 61% 12x 10x 3.2x 3% 27% 0.1x 78% 91% Hibiscus Petroleum* BUY , % -49% 10x 7x 1.5x 0% 15% 0.1x 95% 89% Wah Seong Corp* BUY % -203% 8x 8x 1.1x 4% 12% 0.1x 92% 91% Pantech Group* BUY % -22% 10x 9x 0.9x 4% 9% 0.1x 81% 75% P/E (FD) Price/ BVPS Dividend Yield ROE Net Gearing Corr to Brent Corr to USDMYR Total / weighted avg 33, % 94% 26x 19x 2.7x 2% 12% 0.1x 29% 24% Total small-mid cap 18, % 160% 19x 10x 1.4x 2% 12% 0.1x 86% 87% Sources: AllianceDBS, Bloomberg Finance L.P * Small-mid cap stocks Page 9

10 Abbreviation Term AHTS bbl boe CPP FCB FPSO FSO HUC HWU MCM mmbbl mmbpd mmstb PSV RAPID SSV TADR WHP Decription Anchor Handling Tug Supply Barrel Barrel of oil equivalent Central Processing Platforms Fast Crew Boats Floating Production Storage and Offloading Floating Storage and Offloading Hook-Up & Commissioning Hydraulic Workover Units Maintenance, Construction & Modification One million barrels Million barrels of oil per day Million stock tank barrels Platform Supply Vessels Refinery and petrochemical integrated development project Straight Supply Vessels Tender Assisted Drilling Rigs Wellhead Platforms Sources: AllianceDBS Page 10

11 AllianceDBS recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends Completed Date: 17 Jan :59:15(MYT) Dissemination Date: 17 Jan :01:17(MYT) Sources for all charts and tables are AllianceDBSunless otherwise specified. GENERAL DISCLOSURE/DISCLAIMER This report is prepared by AllianceDBS Research Sdn Bhd (''AllianceDBS''). This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of AllianceDBS Research Sdn Bhd (''AllianceDBS''). The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the DBS Group ) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. 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13 RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Australia This report is being distributed in Australia by DBS Bank Ltd. ( DBS ) or DBS Vickers Securities (Singapore) Pte Ltd ( DBSVS ). DBS holds Australian Financial Services Licence no DBSVS is exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 ( CA ) in respect of financial services provided to the recipients. DBSVS is regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for wholesale investors within the meaning of the CA. Hong Kong This report has been prepared by an entity(ies) which is not licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). This report is being distributed in Hong Kong and is attributable to DBS Vickers Hong Kong Limited, a licensed corporation licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). For any query regarding the materials herein, please contact Paul Yong (CE. No. ASE988) at equityresearch@dbs.com. Indonesia Malaysia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia. This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies. Wong Ming Tek, Executive Director, ADBSR Singapore Thailand This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No E) or DBSVS (Company Regn No G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at for matters arising from, or in connection with the report. This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Page 13

14 United Kingdom This report is produced by AllianceDBS Research Sdn Bhd which is regulated by the Securities Commission Malaysia. This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd, ("DBSVUK"). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom. In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication. Dubai International Financial Centre United Arab Emirates United States Other jurisdictions This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at PO Box , 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it. This report is provided by DBS Bank Ltd (Company Regn. No E) which is an Exempt Financial Adviser as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. This report is for information purposes only and should not be relied upon or acted on by the recipient or considered as a solicitation or inducement to buy or sell any financial product. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situation, or needs of individual clients. You should contact your relationship manager or investment adviser if you need advice on the merits of buying, selling or holding a particular investment. You should note that the information in this report may be out of date and it is not represented or warranted to be accurate, timely or complete. This report or any portion thereof may not be reprinted, sold or redistributed without our written consent. This report was prepared by AllianceDBS Research Sdn Bhd (''AllianceDBS''). DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate. In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions. Page 14

15 DBS Regional Research Offices HONG KONG DBS Vickers (Hong Kong) Ltd Contact: Paul Yong 18th Floor Man Yee Building 68 Des Voeux Road Central Central, Hong Kong Tel: Fax: Participant of the Stock Exchange of Hong Kong MALAYSIA AllianceDBS Research Sdn Bhd Contact: Wong Ming Tek ( U) 19th Floor, Menara Multi-Purpose, Capital Square, 8 Jalan Munshi Abdullah Kuala Lumpur, Malaysia. Tel.: Fax: general@alliancedbs.com SINGAPORE DBS Bank Ltd Contact: Janice Chua 12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore Tel: Fax: equityresearch@dbs.com Company Regn. No E INDONESIA PT DBS Vickers Sekuritas (Indonesia) Contact: Maynard Priajaya Arif DBS Bank Tower Ciputra World 1, 32/F Jl. Prof. Dr. Satrio Kav. 3-5 Jakarta 12940, Indonesia Tel: Fax: research@id.dbsvickers.com THAILAND DBS Vickers Securities (Thailand) Co Ltd Contact: Chanpen Sirithanarattanakul 989 Siam Piwat Tower Building, 9th, 14th-15th Floor Rama 1 Road, Pathumwan, Bangkok Thailand Tel Fax: research@th.dbs.com Company Regn. No Securities and Exchange Commission, Thailand Page 15