Oil & Gas - Still A “Slick” Bet!

Despite a booming 2013, we maintain our OVERWEIGHT call as we believe the sector will continue to be on overdrive in 2014. In our view, it is just a matter of time before more contracts and projects, which were delayed, are finally awarded to the players. In 1Q14, we expect award flows for OSV and jack-up rig players. All eyes will also be on the final investment decision (FID) results for the RAPID project which will spur a re-emergence in interest for the downstream oil and gas players. Marginal field and chemical enhanced recovery projects will also continue to be a mainstay (given Petronas’ aim to increase domestic production), but timeline uncertainties will continue to be a risk. We believe that larger cap stocks will continue to dominate during selections such as: (i) Sapurakencana Petroleum (which coincidentally is our Top Pick for its sole position as Malaysia’s integrated service provider), (ii) UMW O&G, (iii) Bumi Armada, and (iv) Dialog Group. However, investors may also look at smaller-cap ideas for re-rating prospects. In this space, we like Coastal Contract, Alam Maritim and Perdana Petroleum.

2013 - The large oil strike. The overall sector did spectacularly well in 2013 with stocks under our coverage gaining an average of 75% on YTD basis. The significant share price gains are no surprise as around RM30b of domestic contracts (inclusive of international wins, the total rise to RM43.3b) were dished out in 2013, which is a far cry from the c.RM10b contract wins in 2012. Despite significant share price appreciations, we expect further gains as we believe there are still ample project awards in 2014 to act as catalysts.

No slowdown in contracts flow comes 2014. Based on our channel checks, the market is still short of offshore supply vessels (OSVs, i.e., anchor-handling-tug-supply (AHTS), platform supply (PSVs), and (iii) accommodation (barge and boat) vessels and jack-up rigs. Meanwhile, barely any fabrication contracts were awarded in 2013 while risk-service-contracts (RSC)/ Enhanced Oil Recovery projects are seriously lagging behind. All this suggests an abundance of contracts that are yet to be awarded. (Please refer to table titled “Outlook for key upstream oil and gas sub-sectors and potential domestic beneficiaries).

Focus on drilling and OSV stocks in 1Q14, especially the “small-cap” ones. For 1Q14, we believe that the OSV and drilling sector will dominate headlines as: (i) the OSV contracts that were tendered for since end-3Q13 have yet to be awarded and (ii) there are several jack-up rigs entering the market in early-to-mid 2014 that will be looking for contracts before the delivery dates. Whilst the large-cap names like UMW O&G (NOT RATED) in the drilling segment and Bumi Armada (NOT RATED) for the OSV space will remain favourites; we believe that the relative trading PER discounts will spearhead a re-rating for smaller-cap names like peers such as Coastal Contract (COASTAL); Alam Maritim (ALAM) and Perdana Petroleum (PERDANA). For the OSV segment, further catalysts could come from the Icon-Offshore’s IPO (should it emerge this year) assuming it is listed above the CY14 PERs of stocks like ALAM and PERDANA (which stand at 11.3x and 11.9x respectively). In anticipation of heightened interest for the small stocks mentioned above, we are raising our target PERs and consequently their target prices for these stocks. Post our changes, ALAM, PERDANA and COASTAL remain OUTPERFORM at target prices of RM2.07, RM1.82 and RM4.51, respectively.

Laggard plays may surprise. Whilst real awards might come later, we believe that laggard stocks like WASEONG and MHB could see some trading interest should (i) improved market for the respective sectors (fabrication and pipe-coating) and (ii) 4Q13 results come out above our and market expectations.

A revival in the downstream segment? The Final Investment Decision for the Refinery and Petrochemical Integrated Development (RAPID) project is expected by 1Q14. Given its significance to the Malaysian economy, we believe that all efforts will be taken to ensure that the project is good-to-go. Assuming a positive decision, we believe the downstream related stocks (i.e. onshore fabricators, tank terminal operators and process equipment players) will enjoy renewed investors’ interest. Most notably is DIALOG which has a first mover status in the Pengerang area. In our view, DIALOG’s recent strong share price appreciation is due to the stock’s inclusion in the MSCI Index and greater optimism on the RAPID project. In anticipation of a more positive outlook for Pengerang Phase 2A, we have upgraded our TP to RM3.90 on the inclusion of 720k cubic meter (cbm) LNG capacity.

Reiterate OVERWEIGHT call. Our TOP PICK is SKPETRO (OP; TP: RM5.81) as it is the only integrated Malaysian O&G stock. We also maintain our Outperform calls for: ALAM (OP; TP: RM2.07), BARAKAH (OP; TP: RM1.98), COASTAL (OP; TP: RM4.51), DAYANG (OP; TP: RM6.15), DIALOG (OP; TP: RM3.90), PANTECH (OP; TP: RM1.28), PERDANA (OP; TP: RM1.82), SEB (OP; TP: RM0.78), UZMA (OP; TP: RM5.28), and YINSON (OP; TP: RM7.32). We are Neutral and Underperform for PCHEM (MP; TP: RM6.97), PERISAI (MP; TP: RM1.63), GASMSIA (UP; TP: RM3.41), MHB (UP; TP: RM3.39), PETGAS (UP; TP: RM20.77), and WASEONG (UP; TP: RM1.57).

Source: Kenanga

Digi.Com

DiGi reported FY13 revenue of RM6.73bn (+5.9% YoY) and net profit of RM1.71bn (+41.5% YoY). While the revenue was within our expectations, its net profit was slightly above our expectations (making 103% of our FY13 forecast) mainly due to lower-than-expected effective tax rate of 20.3% (FY12: 24.2%) but was within market consensus. The jump in net profit was mainly due to lower depreciation expenses of RM878m (FY12: RM1.33bn) with lower accelerated depreciation upon completion of its network modernisation exercise. DiGi declared a fourth interim dividend of 7.0sen which sums up to a total of 21.3sen for FY13.

Revenue growth driven by data and higher profit due to lower depreciation expense. DiGi’s FY13 service revenue of RM6.13bn (+4.1% YoY) was driven by strong growth in mobile Internet revenue of RM1.23bn (+47.5% YoY) but partly offset by decline in SMS revenue to RM675m (-13.7% YoY), while voice revenue remain resilient at RM4.03bn (-0.5% YoY). The jump in FY13 net profit was mainly driven by: (i) lower depreciation expenses (FY13 depreciation expense was RM452m lower than FY12’s - accounted for 82% of the spike in pre-tax profit); and (ii) lower effective tax rate of 20.3% (FY12: 24.2%). Operationally, DiGi also performed credibly with net add of 501k subscribers for 2013 while blended ARPU remained steady at RM48.

Commendable 4Q13 results and operating numbers. For 4Q13, DiGi reported revenue of RM1.73bn (+6.4% YoY, +2.0% QoQ) and net profit of RM548.5m (+22.2% QoQ, +123.4% YoY). Similar to the whole year results, revenue was driven by internet data growth of 14.1% YoY with increased usage and higher smartphone penetration, while net profit was lifted by lower depreciation expense of RM121.8m (4Q12: RM360.8m) and lower effective rate. Operationally, DiGi net added 168k subscriber with blended ARPU remained flat at RM48. As at end-2013, DiGi’s 3G/HSPA+ coverage has reached over 80% population with improved quality subsequent to completion of network modernisation in 3Q13. Management plans to hit 85% population coverage by end-2014 to narrow the gap between DiGi and its competitors, Celcom and Maxis.

Management guidance. For FY14, management is guiding for revenue growth to be 4%-6% (estimated industry revenue growth of 4%), while EBITDA margin will be sustained at 2013 level of 45%. Management believes that revenue growth will be fairly modest against increasing market competition and capex to revenue ratio will be slightly higher. DiGi is still evaluating the feasibility of setting up a business trust.

Source: PublicInvest Research