Analyst report: Oil & Gas


  • Oil & Gas
  • Tuesday, 05 Jun 2018

Uptrend: A pumpjack operating at the Inglewood oilfield in Los Angeles, California. AmInvestment Bank has maintained its 2018 to 2019 Brent crude oil projection at US70 to US75 per barrel. — Bloomberg

OIL & GAS

By AmInvestment Bank

Overweight (maintained)

FIRST quarter 2018 (Q1’18) results for the eight stocks under AmInvestment Bank’s coverage were fairly decent as five companies came in within expectations with two below.

The only company that exceeded expectations was Dialog Group, which was supported by its Middle East operations amid growing demand for specialist products and services, together with rising activities for its 60% stake in Jubail Supply Base Phase 1, Saudi Arabia.

The research house has maintained its 2018 to 2019 Brent crude oil projection at US$70 to US$75 per barrel compared to the EIA’s Brent crude oil prices at US$71 per barrel for 2018 and a lower US$66 per barrel for 2019, dampened by a projected 11% year-on-year (y-o-y) increase in US daily production to 11.9 million barrels.

As a comparison, Petronas’ 2018 internal crude oil assumption is maintained at only US$52 per barrel for project feasibility studies.

“Following the revelation of the nation’s debt at RM1 trillion, we view that one of the new Pakatan government’s options to raise revenue will be to ramp up Petronas’ production against the backdrop of improved crude prices.

“This will mean a substantive refocus in spending for exploration and production (E&P) activities, even though Petronas president/CEO Tan Sri Wan Zulkiflee Wan Ariffin had earlier said that the group will be investing in further downstream operations such as speciality chemicals and renewable energy solutions, including solar.

“As such, we expect the asset utilisation rates for local service companies to improve significantly in the medium to longer term, even though charter rates could remain unexciting in the light of excess capacity globally,” said AmInvestment Bank.

Malaysia’s first quarter 2018 contract awards jumped 68% quarter-on-quarter and 36% y-o-y to RM2.7bil due to SAPURA ENERGY securing the engineering, procurement, construction, installation & commissioning (EPCIC) work for the Pegaga CPP and Serba Dinamik’s engineering, procurement & construction (EPC) and operation and maintenance (O&M) jobs.

Although the Pegaga EPCIC job is lumpy, an increase in first quarter orders augurs a reversal from the 2017 order decline of 15%, given Petronas’ downstream focus, particularly on Rapid in Pengerang, Johor.

Note that Petronas’ Integrated Logistics Control Tower project, which was expected to be awarded late last year for 110 vessels under 23 packages on a three-plus-two-year basis, has yet to be announced.

The research house maintains an overweight view on the sector, given the stabilising crude oil prices above US$75 per barrel, underpinned by the resumption of nuclear sanctions on Iran and a deterioration in Venezuela’s output.

Notwithstanding Petronas’ cautious capex strategy, asset utilisation rates have begun to improve.

Hence, charter rates are expected to have bottomed out even in the absence of any upward trajectory at this juncture.

CREST BUILDER HOLDINGS BHD

By Rakuten Trade

Buy

Target price: RM1.05

CREST Builder Holdings Bhd has over 30 years of track record in the construction industry with footprints in other segments, namely property development, property investment and management, as well as concession agreement.

Crest Builder’s construction arm hit its all-time high outstanding order book at RM1.3bil, including the Quarza Mall project (RM438.3mil) by Sime Darby located in Setapak.

Meanwhile, contracts won during the first quarter of 2018 have already touched RM596.1mil.

This sizeable order book translates into an order book cover ratio of 5.9 times on FY2017 construction revenue, providing earnings visibility until 2020.

On its property development segment, the ongoing and future gross development value (GDV) stands at RM4.13bil.

This includes its upcoming RM1.2bil transit-oriented development (TOD) project named Latitud8 which sits on top of the Dang Wangi LRT station.

In addition, Crest Builder has entered into a 23-year maintenance concession agreement with Universiti Teknologi Mara (UiTM).

Ending 2034, this concession provides decent rental income of RM43.5mil per annum. Crest Builder’s net profit is expected to achieve double digit growth of about 14.8% in FY2018, underpinned by concession income from UiTM and management’s active bidding on selected projects.

Crest Builder is currently trading at around 64% discount to its book value per share and is currently at a multi-year low valuation with forward price-earnings ratio of only 4.9 times, compared to its three-year historical average of 10.7 times.

BANKING

By MIDF Research

Positive (maintained)

THE banking system’s total loans grew at a faster pace in April 2018 at 4.8% year-on-year (y-o-y) to RM1.61 trillion.

Comparatively, it expanded 4.4% y-o-y to RM1.6 trillion as at March 2018.

This could be due to a rebound in loan demand in March from the decline registered in February.

MIDF Research expects that loan growth to pick up further in the coming month due to the healthy loan pipeline.

Loans for the purchase of residential property continued to be robust at 8.9% increase y-o-y to RM533.5bil.

It is the largest contributor to loans in the banking system at 33.1%.

Also, it seems that mortgages seem to settling around this level since December 2016.

This could indicate a steady state in loans growth for the segment and could also mean that there is a continuous stable demand for housing and the associated financing.

The next highest contributor is working capital loans at 23.2%.

MIDF Research is encouraged by the faster pace loans growth at 1.3% y-o-y to RM372.8bil.

“While loan approval grew at faster rate than loans applied, approval rate still came in lower.

“However, we believe that this was due to the banking system not being able to keep pace with demand rather than a pull-back in loans approval by the banks.

“The first four months loan approval rate was maintained at the 43% level, which we believe that it is still healthy,” said AmInvestment Bank.

Deposits grew at a faster pace for the second month coming in at 5.4% y-o-y.

However, current account savings account (CASA) deposits slowed slightly at 6% increase y-o-y.

This could be due to depositors switching to fixed deposits.

Nevertheless, the research house did not observe any compression in margins as average lending rate went up higher by four basis points month-on-month to 4.9% compared to stable savings and a fixed deposit rate.

“We maintain our expectations that loans growth will come in better in 2018 as compared to 2017 level, based on the current trend of loans applied and approval which will provide a steady loans pipeline.

“However, we are revising our loans growth expectations slightly from 6% y-o-y previously to 5.5% y-o-y.

“This is due to the impact of the surprised result of GE14. We foresee the delay in loans demand and disbursement coming from corporate and SME segment as businesses adopt a ‘wait-and-see’ approach to the new government’s economic policy direction.

“However, we expect the retail segment will continue to be the main driver for loans growth this year,” said MIDF Research.

The research house believes the stable employment environment will drive loan growth.

With higher demand and approval for loans, the banking sector will be able to maintain its earnings potential.


   

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