19 September 2017 Taking a breather in 3Q before charging ahead We saw domestic O&G contract flows and global oil prices take a breather in 3Q. 2Q17 sector earnings were better yoy mainly due to downstream players. We remain confident that contract flows in 2017 will surpass 2016 levels. We tone down our expectations and now look for Brent prices to be in a range of USD50-55/bbl in 2017 (from USD55/bbl) and USD55-60/bbl in 2018. Our view on long-term oil prices is unchanged at USD60-65/bbl. We maintain our NEUTRAL sector rating and our top picks are PCHEM, Bumi Armada and Serba Dinamik. Fewer earnings misses as compared to 1Q17 Core net profit for O&G companies under coverage posted a 27.5% yoy growth in the recently concluded reporting season, mainly supported by Petronas Chemical (PCHEM), Bumi Armada (BAB) and Dialog. PCHEM benefited from a higher product ASP and volume as well as stronger USD. Maiden earnings contribution from FPSO Olombendo, FSU Malta and oneoff income from ONGC and LukOil helped lift BAB s earnings. Dialog s earnings growth was mainly supported by the ongoing PDT Phase 2 construction activities. Of the 12 stocks under coverage, 2 exceeded our expectations, 7 were in line and 2 fell short of our expectations. Sapura Energy plans to release its 2Q18 (FYE Jan) results later this month. Drought in 3Q contract flows to pick-up in 4Q So far in 3Q17, contract values are down 87% qoq to RM1bn. Apart from that, the number of contracts awarded came to just 6, vs. 17 in 2Q17. We expect contract flows to pick up for the rest of 2017 following the award of Petronas modification, construction and maintenance (MCM) contract. Maintain sector NEUTRAL; top picks: PCHEM, BAB, and SDH After an internal restructuring, MISC has been classified under our O&G sector. For sector exposure, our top large-cap pick is Petronas Chemical (PCHEM MK, RM7.35), which we upgraded to BUY after its 2Q17 results. In the small/mid cap space, we like Bumi Armada (BAB MK, RM0.74, BUY) and Serba Dinamik (SDH MK, RM2.21, BUY). In this report, we have also lifted our earnings and TP on Dialog (DLG MK, RM2.00), while maintaining our HOLD call. Given our recent downgrade on a change in its fundamentals, Petra Energy (PENB MK, RM0.98, HOLD) falls out of our top small-cap picks. We maintain our NEUTRAL call on the sector. Peer\Comparison Stock Rating Share Price TP Mkt Cap Core PE (x) Core EPS Grow th (%) P/BV ROE (%) DY (%) (RM) (RM) (RMm) CY17E CY18E CY17E CY18E CY17E CY17E FY17E FY18E Petronas Chemical BUY 7.35 8.00 58,800.0 16.2 14.7 16.2 10.5 2.0 12.5 3.2 3.5 Petronas Gas HOLD 18.34 19.30 36,289.9 20.7 18.7 0.1 11.0 2.9 14.0 3.1 3.5 MISC SELL 7.37 6.50 32,898.2 16.8 18.2 (7.1) (7.4) 0.8 5.2 4.1 4.1 Dialog HOLD 2.00 2.10 11,283.3 31.5 27.6 8.7 14.3 3.5 12.8 1.3 1.5 Sapura Energy HOLD 1.63 1.35 9,815.1 58.2 32.1 (27.6) 81.5 0.7 1.3 0.6 0.6 Bumi Armada BUY 0.74 0.95 4,311.7 13.7 9.7 >100 40.6 0.7 5.3 - - Gas Malaysia HOLD 2.95 3.22 3,787.8 23.1 22.0 (0.7) 4.7 3.6 15.8 4.3 4.5 Serba Dinamik BUY 2.21 2.75 2,950.4 10.1 8.8 18.5 14.7 3.6 36.0 2.5 3.4 MMHE HOLD 0.76 0.73 1,216.0 239.5 27.5 >100 769.4 0.5 0.2 - - UMW Oil and Gas HOLD 0.31 0.35 659.4 n.m n.m 47.3 17.7 0.2 n.m - - Petra Energy HOLD 0.98 1.03 313.7 n.m 8.4 72.1 >100 0.8 n.m 5.1 5.1 Alam Maritim SELL 0.18 0.15 166.4 n.m n.m 52.8 45.8 0.2 n.m - - Weighted Average 22.5 18.2 4.1 18.0 2.0 10.8 3.0 3.2 Simple Average 47.8 18.8 18.0 91.2 1.6 11.4 2.0 2.2 Source: Bloomberg, Affin Hwang forecasts. Note: Pricing as of close on 18 Sept 2017 Sector Update Oil & Gas Neutral (maintain) Absolute Performance (%) 1M 3M 12M PCHEM 2.4 1.9 11.5 Pet Gas (2.4) (3.0) (16.3) MISC 0.7 (0.4) (2.1) Dialog 3.1 4.2 30.7 SAPE 8.7 (11.4) 5.8 Armada (1.3) (3.9) 1.4 GasMsia (2.3) 0.3 17.1 Serba 2.3 12.2 n.a MMHE 6.3 (11.1) (24.8) UMWOG (7.6) (39.6) (65.9) P.Energy (2.0) (18.1) (0.5) Alam 2.9 (14.3) (34.5) O&G Sector Top Picks Name Rating Price TP (RM) (RM) PCHEM BUY 7.35 8.00 Bumi Armada BUY 0.74 0.95 Serba Dinamik BUY 2.21 2.75 Tan Jianyuan, ACCA (603) 2146 7538 jianyuan.tan@affinhwang.com Page 1 of 13
3QCY13 4QCY13 1QCY14 2QCY14 3QCY14 4QCY14 1QCY15 2QCY15 3QCY15 4QCY15 1QCY16 2QCY16 3QCY16 4QCY16 1QCY17 2QCY17 19 September 2017 2Q17 results round-up Overall a better quarter As compared to the previous quarter (1Q17) where none of the companies under our coverage reported results above expectations, Dialog and MISC surprised on the upside in 2Q17. We saw a similar number of companies (7) reporting in-line earnings, while 2 companies (excluding Sapura Energy) disappointed as compared to 3 in 1Q17. Fig 1: Overview of companies under coverage Above expectations In-Line Below expectations Dialog Petronas Chemical Sapura Energy* MISC Bumi Armada MMHE Serba Dinamik Petra Energy Petronas Gas Gas Malaysia UMW Oil and Gas Alam Maritim Source: Affin Hwang *FYE January (1QFY18) Fig 2: Core net profit for O&G companies under coverage RMm yoy chg (%) 2,500.0 120% 2,000.0 1,500.0 1,000.0 500.0-100% 80% 60% 40% 20% 0% -20% -40% -60% Source: Affin Hwang 2Q17 sector revenue rose 30.2% yoy, 7.7% qoq The O&G sector ended 2Q17 with an aggregate revenue of RM23.1bn. If we exclude the recently listed Lotte Chemical, sector revenue came in at RM21.3bn (+20.2% yoy, -0.6% qoq). On a cumulative basis, 1H17 s revenue soared 27% yoy to RM44.6bn. We believe the better way to assess the recovery of the overall sector in terms of work activities would be to look at the revenue instead of the net profit. Page 2 of 13
1QCY15 2QCY15 3QCY15 4QCY15 1QCY16 2QCY16 3QCY16 4QCY16 1QCY17 2QCY17 ` 19 September 2017 We note that shipbuilders (ie: Malaysia-listed Coastal Contracts and Singapore-listed Nam Cheong) have seen activities recover in 1H17. Fabricators like MMHE continued to face pressure in terms of slow order book replenishment and work activities. Offshore support vessel (OSV) players still posted weaker revenue yoy due to depressed charter rates amidst improvement in vessel utilisation. Hook up commissioning and maintenance (HuCC/TMM) players continued to see weaker yoy activities as well. Downstream companies (ie: Petronas Chemical/Dagangan, Dialog, Petron Malaysia) recorded stellar performances supported by better average selling prices in general. FPSO companies (Yinson and Bumi Armada) also posted stronger revenue figures. Fig 3: Aggregate revenue for O&G sector Total revenue (LHS) Lotte Chemical yoy growth (RHS) (RMbn) (%) 24.0 23.0 22.0 21.0 20.0 19.0 18.0 17.0 16.0 15.0 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% Source: Bloomberg, Affin Hwang Fig 4: O&G coverage report card Financial EPS vs Affin Hwang vs consensus Call Revised TP Previous Revised Company quarters Change estimates estimates Change Previous Call Call Change TP TP RM RM Petronas Chemical 2QFY17 Inline Inline Hold Buy 7.70 8.00 Petronas Gas 2QFY17 Inline Inline Hold Hold 20.72 19.30 MISC 2QFY17 Above Inline Sell Sell 6.50 6.50 Dialog Group 4QFY17 Above Inline Hold Hold 1.85 2.10 Sapura Energy* 1QFY18 Below Below Hold Hold 1.70 1.35 Bumi Armada 2QFY17 Inline Inline Buy Buy 0.95 0.95 Gas Malaysia 2QFY17 Inline Inline Hold Hold 2.99 3.22 Serba Dinamik 2QFY17 Inline Inline Buy Buy 2.40 2.75 MMHE 2QFY17 Below Below Buy Hold 1.12 0.73 UMW Oil & Gas 2QFY17 Inline Inline Hold Hold 0.63 0.35 Petra Energy 2QFY17 Below Below Buy Hold 1.55 1.03 Alam Maritim 2QFY17 Inline Inline Sell Sell 0.15 0.15 Source: Affin Hwang *FYE January 2Q results to be released end-september Note: All changes to call and TP were made earlier after the recent results announcements Page 3 of 13
Chevron Shell BP Conoco Phillips TOTAL Exxon Mobil Statoil ENI 1Q09 2Q09 3Q09 4Q09 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 ` 19 September 2017 Contract flow gaining momentum 91% of 2016 full-year contract value as at 15 September 2017 As at our cut-off date of 15 September 2017, the total YTD contract value for the sector amounted to RM1bn (-87% qoq, -84% yoy). The steep decline both qoq and yoy was attributable to an exceptionally high base, whereby Yinson was awarded a FPSO contract in 2Q17 and Wah Seong was awarded the Nord Stream 2 project in 3Q16. On a cumulative basis, 9M17 contracts award increased 6% yoy and totalled RM11.5bn. We believe 4Q17 will see an exponential jump in contract value as The Edge reported yesterday that Petronas will be awarding the MCM contract to the respective players soon. Potential beneficiaries named in the report include Sapura Energy, Dayang, Petra Energy, Carimin Petroleum, Deleum, Icon Offshore, and privately-held Borneo Sea Offshore Engineering Sdn Bhd. Fig 5: Malaysia quarterly oil and gas contract flow RMm 16,242 16,082 14,512 8,526 7,189 5,759 3,488 3,539 4,230 3,833 2,239 1,020 1,601 1,716 255 603 540 981 1,131 460 4,484 11,570 5,538 2,317 9,743 4,237 2,477 8,005 3,188 1,510 6,112 1,713 2,818 7,633 1,006 Source: Bursa Malaysia, Affin Hwang (note: 3Q17 is through 15 September 2017) Declining global capex likely to put pressure on future growth Most of the global oil majors have kept their capital expenditure guidance relatively unchanged in their latest result updates. Only ConocoPhillips revised its 2017 capital spending lower by US$200m to US$4.8bn citing uncertainty in the market. If we were to compare the changes between 2017 vs. 2015, capex spending has declined by an average of 32%. In our view, there are 2 ways to look at it: (1) the cost base has been reduced over the years and hence companies are able to reduce capex spending from these cost savings, and (2) companies continue to hold back exploration/production spending which will impact the long-term supply, which should then help lift oil prices. Fig 6: Oil majors capex trend US$bn 50 45 40 35 30 25 20 15 10 5 0 2014 Actual 2015 Actual 2016 Actual 2017 Estimate 2018 Estimate 2019 Estimate -7% -12% -13% 14% 0% 2% 9% -30% Source: Companies, Affin Hwang (note: boxes indicate the yoy capital expenditure changes in 2017E) Page 4 of 13
Cash flow remains key Strong emphasis on cash flow in current environment Post 2Q17 results, we saw a slight deterioration in the companies cash flow levels as compared to our previous assessment in May 2017. In order to assess a company s ability to continue as a going concern, we have conducted a cash flow analysis on the companies by evaluating their aggregated operating cash flows over the past four quarters with their latest cash positions, and assess if this would be sufficient to cover the next 12 months of borrowings falling due. We divided our list of companies into 2 categories market capitalisation of at least RM1bn and below RM1bn. Among the big-caps, Bumi Armada s gearing has increased from 1.84x to 1.88x, while the shortfall has widened to RM1.4bn. We are not overly concerned with this, as the group will likely see better cash flow in 2H17 following the operational commencement of all the FPSOs and FSU, which will reduce the gearing level. Compared to our previous assessment, UMWOG and Dayang have dropped out of the RM1bn list given their decline in market capitalisation and we have added the newly listed Lotte Chemical in the table. Fig 7: O&G companies with market cap of at least RM1bn Company Name Operating cash flow (LC m) Cash position (LC m) ST borrowing (LC m) Excess/ (shortfall) (LC m) Net Debt/Equity (x) -4Q -3Q -2Q -1Q Latest Latest Latest Latest Last 4Qs quarter quarter quarter quarter Petronas Chemical 901 1,284 940 1,359 1,612 7,580-12,775 (0.26) Petronas Gas 664 692 767 581 679 2,275 32 4,962 0.05 MISC 1,458 1,704 451 1,468 863 5,390 6,659 3,216 0.16 Petronas Dagangan 91 (95) 723 212 417 2,571 18 3,810 (0.46) Sapura Energy 795 166 1,095 720 321 2,146 1,161 3,288 1.16 Dialog 83 141 148 156 158 1,414 415 1,601 0.00 Lotte Chemical* N.A N.A N.A N.A 956 307 37 1,226 (0.03) Bumi Armada 259 259 (727) 192 (368) 1,793 2,601 (1,452) 1.88 Gas Malaysia 147 95 70 (94) 94 485 64 586 (0.32) Yinson (43) 108 100 (220) 234 633 185 670 1.13 Serba Dinamik* N.A N.A N.A (6) 2 325 498 (178) 0.12 Petron Malaysia (25) 68 130 105 169 156 33 594 (0.07) MMHE (99) (119) 62 17 24 682 20 647 (0.26) Source: Bloomberg, Affin Hwang; Green, yellow and red indicates healthy, moderate and low operating cash flow level based on historical trend *Historical figures not available due to it being newly listed on Bursa Malaysia Page 5 of 13
In the small-mid cap space, the names with short-term shortfalls are the usual suspects like UMWOG (RM1.1bn), Perisai (RM1.3bn), Wah Seong (RM428m), KNM (RM418m) and TH Heavy (RM213m). The gearing levels of Perisai, EA Technique, TH Heavy and UMWOG continue to be worrying. Fig 8: O&G companies with market cap of below RM1bn Company Name Operating cash flow (LC m) Cash position (LC m) ST borrowing (LC m) Excess/ (shortfall) (LC m) Net Debt/Equity (x) -4Q -3Q -2Q -1Q Latest Latest Latest Latest Last 4Qs quarter quarter quarter quarter UMW Oil & Gas (18) 21 6 (74) (6) 413 1,476 (1,115) 1.55 Dayang 27 6 207 102 (53) 256 353 166 0.99 Wah Seong 50 88 (11) 39 (20) 259 783 (428) 0.96 Coastal Contract 128 (58) 25 (34) 26 368 65 261 0.01 Favelle Favco 23 2 50 36 (15) 77 24 125 (0.21) KNM Group 49 (30) (179) (47) 7 311 479 (418) 0.39 Uzma (13) 23 (8) 13 15 101 153 (10) 0.82 Barakah Offshore 41 0 81 23 (55) 146 57 139 0.19 Pantech 24 27 12 (7) (29) 106 165 (55) 0.20 Petra Energy 21 74 (159) 6 3 173 162 (66) (0.04) Deleum 35 23 19 76 (36) 150 50 183 (0.17) Scomi Energy (6) 2 (7) 50 (54) 58 216 (166) 0.28 Icon Offshore 10 89 (40) 10 7 40 241 (135) 1.16 Scomi Group (20) (12) (29) 30 (57) 118 665 (614) 0.67 EA Technique 35 89 38 119 45 19 81 229 2.49 Sumatec Resources (42) 1 (6) (0) 2 2 23 (23) 0.03 Alam Maritim 11 (7) (6) (2) 34 78 137 (39) 0.10 T7 Global (3) (5) 8 (9) (16) 26 1 2 (0.13) Carimin Petroleum (1) 1 12 1 12 44 16 54 0.23 TH Heavy Engineering 36 (38) 60 (5) 43 22 295 (213) 1.92 Perisai Petroleum (2) 14 (11) 4 (3) 16 1,317 (1,296) 5.18 TAS Offshore 13 (9) (20) (3) (9) 4 53 (91) 0.31 Perdana Petroleum (12) 25 148 78 (6) 26 181 90 1.26 Source: Bloomberg, Affin Hwang; Green, yellow and red indicates healthy, moderate and low operating cash flow level based on historical trend Page 6 of 13
Oil price should recover on better dynamics Time is not on our side The Brent crude price has been hovering in the US$48-53/bbl range from July to August 2017 on renewed market concerns on oversupply, making it rather difficult to achieve our earlier US$55/bbl average price assumption for 2017E. In this report, we reduce our expectation slightly and now look for the Brent price to be in the US$50-55/bbl range for 2017E. For 2018E, we expect the average Brent price to be in the range of US$55-60/bbl. We maintain our long-term Brent price forecast at US$60-65/bbl. Fig 9: Brent and WTI oil price trend Source: Bloomberg, Affin Hwang Slowdown in US shale will likely lead to higher oil price Recent evidence shows that the golden days of shale oil production may not last as long as we had expected. In Fig 10, which shows Bakken production profile, we note that the production level has been declining despite an increasing number of producing wells, which suggests that the productivity curve may have been brought ahead at the expense of future production, in our view. Further supporting our view whereby we extracted the data on total US shale oil production and operating rigs (Fig 11-12), we noticed that productivity per rig has declined since peaking in July 2016. In addition, the cost of shale production has been inching up and is expected to rise further. These all point to a slower supply moving forward, which will likely help in the overall supply-demand dynamics and lift the oil price in 2018. EIA has revised down US oil production for both 2017/18 by 100kbpd and 70kbpd to 9.25mbpd and 9.84mbpd respectively, in line with our observations. Page 7 of 13
Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 ` 19 September 2017 Fig 10: Bakken shale oil production barrels Daily production (LHS) Number of producing wells (RHS) wells 1,400,000 12,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 10,000 8,000 6,000 4,000 2,000 - - Source: Bloomberg, Affin Hwang Fig 11: Total US shale production and rig count Fig 12: Productivity of US shale (barrel per day/rig) Source: Bloomberg Source: Bloomberg US inventory drawdown in line with earlier expectations We are pleased to note that US inventories levels are moving closer to its past 5 year average, which is now only a mere 50m bbls away. US inventory levels have fallen close to 70m barrels from their record high level of 536m bbls in March 2017. This signals to us that excess oil in the market is being absorbed, supported by seasonally higher demand as well as lower OPEC exports. While this is a positive sign and aligns with our view as updated previously, inventory levels for the rest of the developed countries continue to hover at a rather high level 3,000m bbls, which could be one of the reasons why global oil prices have been hovering at current levels. Page 8 of 13
Fig 13: US oil inventories Fig 14: OECD commercial oil inventory Source: Bloomberg Source: EIA, Bloomberg Lower supply, higher demand to drive oil price According to the EIA forecast, 1H18 will continue to see the market being flooded with more supply, however long-term robust demand is expected to support oil prices going forward. The EIA has raised its 2018 global oil demand growth forecast from 1.61m bbl/day to 1.69m bbl/day in its shortterm energy outlook (STEO) released in September. With stronger forecasted demand, supply looking to slow down and the continuous drawdown in stockpiles, we believe oil prices are poised to recover to a higher level. Fig 15: Global supply and demand trends and forecasts Source: EIA Page 9 of 13
Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 HENG YUAN PETRON (M) SERBA DINAMIK HIBISCUS PANTECH DIALOG PCHEM WAH SEONG PETGAS PETDAG YINSON T7 GLOBAL SAPURA ENERGY BUMI ARMADA HANDAL FAVELLE FAVCO COASTAL EA TECHNIQUE ICON OFFSHORE LOTTE CHEMICAL DAYANG ALAM MARITIM DELEUM KNM PETRA ENERGY TAS OFFSHORE UZMA CARIMIN TH HEAVY DAYA MATERIALS MMHE SCOMI ENERGY BARAKAH PERISAI HENG YUAN PETRON (M) SERBA DINAMIK PANTECH DIALOG YINSON BUMI ARMADA WAH SEONG T7 GLOBAL HIBISCUS FAVELLE FAVCO PCHEM DAYA MATERIALS PETRA ENERGY PETDAG HANDAL DAYANG SAPURA ENERGY LOTTE CHEMICAL TAS OFFSHORE COASTAL CARIMIN PETGAS DELEUM UZMA MMHE KNM KKB ALAM MARITIM BARAKAH EA TECHNIQUE SCOMI ENERGY ICON PERISAI ` 19 September 2017 Performance and valuations Fig 16: QoQ performance 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% Fig 17: YTD 2017 performance 350% 300% 250% 200% 150% 100% 50% 0% -50% -100% Source: Bloomberg, Affin Hwang Source: Bloomberg, Affin Hwang Maintain Neutral, sector valuation remains expensive We maintain our NEUTRAL call on the sector, as valuations continue trade at a premium (31x forward PER), representing +1.5SD above its past 5-year forward mean PER. While contract flows this year are tracking to surpass 2016 levels, we believe they are still rather lacklustre. Besides that, service providers in the O&G sector continue to see their earnings lag behind their valuations making them not appealing, apart from a select few names as mentioned below. Our top sector picks are PCHEM (among large caps), as well as Bumi Armada and Serba Dinamik among small/mid caps. Fig 18: Sector valuation trading at a premium Forward P/E Ratio Mean +1SD +2SD -1SD -2SD 35 30 +2SD: 32.5x +1SD: 28.0x 25 Mean: 23.5x 20-1SD: 19.0x 15 +2SD: 14.5x 10 Source: Bloomberg, Affin Hwang forecasts; note: pricing through 15 September 2017 When a report covers six or more subject companies please access important disclosures for Daiwa Capital Markets Hong Kong Limited at http://www.daiwacm.com/hk/research_disclaimer.html or contact your investment representative or Daiwa Capital Markets Hong Kong Limited at Level 26, One Pacific Place, 88 Queensway, Hong Kong. Page 10 of 13
Fig 19: Top picks in the Malaysia O&G sector Top picks Rating Analysts Comments Petronas Chemical (PCHEM MK) Target Price : RM8.00 Share Price as at 18 Sep 2017 : RM7.34 (RM) 9.00 8.00 7.00 6.00 5.00 4.00 3.00 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Apr-17 Aug-17 Bumi Armada (BAB MK) Target Price : RM0.95 Share Price as at 18 Sep 2017 : RM0.74 (RM) 2.50 2.00 1.50 1.00 0.50 0.00 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Apr-17 Aug-17 Serba Dinamik (SDH MK) Target Price : RM2.75 Share Price as at 18 Sep 2017 : RM2.21 (RM) 2.40 2.20 2.00 1.80 1.60 1.40 1.20 1.00 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Source: Bloomberg, Affin Hwang BUY BUY BUY In the recently-concluded reporting season, we upgraded PCHEM to BUY (from HOLD) with a higher 12-month TP of RM8.00 (from RM7.70 previously), based on a 2018E PER of 18x. While the share price is up 4% since the 2Q17 results, we maintain our BUY call on the stock. We reckon that earnings upside may materialize from a better pricing environment for ethylene-based products, which should offset the lower earnings from the heavy plant turnaround in 2H17. This is due to better petrochemical supplydemand dynamics from the recent ethylene plant closure in US as a result of the hurricane. Key risks to our BUY call would be a decline in product ASPs, lower plant utilisation levels and weaker product demand. For our latest update on PCHEM, see Upgrading: weak 2H17E looks priced in, 11 August 2017. BAB is one of our top sector picks with an SOTP-based 12-month TP of RM0.95. We believe the interim agreement entered with EnQuest for FPSO Kraken will lift the negative sentiment surrounding BAB to a certain extent. This would also indicate that we do not expect any additional provisions for the delay in FPSO Kraken. In addition, we also expect 2H17 earnings to be stronger with FPSO Olombendo progressively getting final acceptance. Key risks to our BUY call would be weaker-than-expect OSV fleet utilisation and the termination of existing FPSO contracts. For our latest updated on BAB, see We see clearer skies from here on, 28 August 2017. We recently raised our 12-month TP for Serba to RM2.75 (from RM2.40), based on a 2018E PER of 11x, following the announcement of Pengerang Integrated Development Complex, which they will be undertaking. We continue to like Serba for its competitive edge in the Middle East market (>50% of its revenue predominantly in this region), maintenance business which is more resilient in nature to oil price, and attractive valuation. Key downside risks to our BUY call would be unforeseen delays for client-maintenance scheduling and margin deterioration. For our latest update on Serba Dinamik, see Setting a footprint, 21 August 2017. Page 11 of 13
Raise Dialog s profit by 3-6%; keeping others infact for now We are taking the opportunity to raise our Dialog s FY18-20E net profit forecasts by 3-6% as we take into account the 430,000 cm³ expansion plan of Pengerang Deepwater Terminal (PDT) Phase 1 terminal. Its partner, Vopak who owns a 44% stake in this project has announced that this expansion is expected to commission progressively from 1Q19 onwards, which will cater to clean petroleum products. This would bring total capacity of PDT Phase 1 to 1.7m cm³. We maintain a HOLD call with a higher TP to RM2.10 (from RM1.85 previously) based on sum-of-theparts (SOTP) valuation. Earnings & Valuation Summary FYE 30 Jun 2016 2017 2018E 2019E 2020E Revenue (RMm) 2,534.5 3,392.9 2,939.4 3,126.6 3,208.7 EBITDA (RMm) 334.2 373.3 403.0 456.7 478.3 Pretax profit (RMm) 368.7 448.8 449.9 513.1 621.8 Net profit (RMm) 294.9 370.6 349.0 399.0 484.8 EPS (sen) 5.6 6.7 6.4 7.4 8.9 PER (x) 34.5 28.9 31.1 27.2 22.4 Core net profit (RMm) 261.0 328.1 349.0 399.0 484.8 Core EPS (sen) 5.0 5.9 6.4 7.4 8.9 Core EPS growth (%) (2.8) 25.7 8.7 14.3 21.5 Core PER (x) 39.0 34.3 31.1 27.2 22.4 Net DPS (sen) 2.2 2.7 2.6 2.9 3.6 Dividend Yield (%) 1.1 1.4 1.3 1.5 1.8 EV/EBITDA (x) 25.1 22.4 19.9 17.7 14.9 Chg in EPS (%) - +3.4 +5.6 Affin/Consensus (%) 0.9 0.9 1.0 Source: Company, Affin Hwang estimates Fig 20: Dialog SOTP valuation Sum of parts valuation Value (RM m) Source: Company, Affin Hwang estimates Value per share (RM) Remarks Traditional Oil & Gas services businesses 4,835.9 0.89 12x FY18E EV/EBITDA Kerteh Terminals (30% stake) 117.1 0.02 NPV of FCFF at 6.9% WACC Langsat 1 & 2 Terminals (44% stake) 178.7 0.03 NPV of FCFF at 6.9% WACC Pengerang Terminal Phase 1 (46% stake) 2,350.9 0.43 NPV of FCFF at 6.9% WACC Pengerang Terminal Phase 2 (25% stake) 1,654.7 0.31 NPV of FCFF at 6.9% WACC Pengerang Terminal Phase 3 (25% stake) 1,013.1 0.19 NPV of FCFF at 6.9% WACC Upstream assets 1,152.0 0.21 Enterprise Value 11,302.4 2.09 Net Debt (147.5) (0.03) Net debt as at end FY17E Equity Value 11,155.0 2.06 Assume full conversion of warrants Proceeds from conversion of warrants (RMm) 167.8 Fully Diluted Equity Value (RM m) 11,322.8 Enlarged share base (m shares) 5,420.0 Fully diluted RNAV per share (RM/share) 2.10 Risks to our sector call Key upside risks to our NEUTRAL view on the sector would be a sharp rebound in oil prices, quicker contract flows leading to a better-thanexpected earnings delivery. A slump in oil prices, further impairments and disappointment in earnings delivery would pose downside risks. Page 12 of 13
Equity Rating Structure and Definitions BUY Total return is expected to exceed +10% over a 12-month period HOLD Total return is expected to be between -5% and +10% over a 12-month period SELL Total return is expected to be below -5% over a 12-month period NOT RATED Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a recommendation The total expected return is defined as the percentage upside/downside to our target price plus the net dividend yield over the next 12 months. OVERWEIGHT Industry, as defined by the analyst s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months NEUTRAL Industry, as defined by the analyst s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months UNDERWEIGHT Industry, as defined by the analyst s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months This report is intended for information purposes only and has been prepared by Affin Hwang Investment Bank Berhad (14389-U) ( the Company ) based on sources believed to be reliable. However, such sources have not been independently verified by the Company, and as such the Company does not give any guarantee, representation or warranty (express or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or rendered in this report. Facts, information, views and/or opinion presented in this report have not been reviewed by, may not reflect information known to, and may present a differing view expressed by other business units within the Company, including investment banking personnel. Reports issued by the Company, are prepared in accordance with the Company s policies for managing conflicts of interest arising as a result of publication and distribution of investment research reports. Under no circumstances shall the Company, its associates and/or any person related to it be liable in any manner whatsoever for any consequences (including but are not limited to any direct, indirect or consequential losses, loss of profit and damages) arising from the use of or reliance on the information and/or opinion provided or rendered in this report. Any opinions or estimates in this report are that of the Company, as of this date and subject to change without prior notice. Under no circumstances shall this report be construed as an offer to sell or a solicitation of an offer to buy any securities. The Company and/or any of its directors and/or employees may have an interest in the securities mentioned therein. The Company may also make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences and hence an independent evaluation is essential. Investors are advised to independently evaluate particular investments and strategies and to seek independent financial, legal and other advice on the information and/or opinion contained in this report before investing or participating in any of the securities or investment strategies or transactions discussed in this report. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Company s research, or any portion thereof may not be reprinted, sold or redistributed without the consent of the Company. The Company, is a participant of the Capital Market Development Fund-Bursa Research Scheme, and will receive compensation for the participation. This report is printed and published by: Affin Hwang Investment Bank Berhad (14389-U) A Participating Organisation of Bursa Malaysia Securities Berhad 22nd Floor, Menara Boustead, 69, Jalan Raja Chulan, 50200 Kuala Lumpur, Malaysia. T : + 603 2146 3700 F : + 603 2146 7630 research@affinhwang.com Page 13 of 13