Stay nimble in O&G sector trading, says Kenanga

  • Analyst Reports
  • Thursday, 09 Jul 2020

KUALA LUMPUR: When it comes to oil and gas stocks, Kenanga Investment Bank Research is not in favour of a bargain-hunting strategy, especially for long-term investors.

"We believe investors should approach the sector with a 'nimble trading' approach, and adopt a 'bottom-up' strategy to identify any short-term thematic plays within the sector, should the opportunity arise," it said.

In its sector outlook, the research house said the recent share price rebounds in the sector could have been premature and that corrections could still occur before the underlying fundamentals catch up to valuations.

"Despite the current climate, the KL Energy Index is currently trading at a forward PER of 25x – close to +1SD premium against its average of 21.7x," it said.

Earnings in 1H2020 are largely expected to be weak despite the ongoing operations due to the operational distruptions caused by the movement restrictions as well as weaker oil price outlook leading to lower activity levels.

While Kenanga expects stronger core earnings in the second half of the year, there are potential risks such as asset impairments and weaker asset utilisation and activity levels

It noted that there could also be M&A activities within the sector, especially in the offshore vessel space, which would help OSV playes strenghten their operational efficiency and competitiveness.

Kenanga has a "neutral" rating on the sector with no outright stock picks.

However, it said Petronas Chemicals and Hibiscus Petroleum are good trading proxies for oil prices.

It also recommended provien resilient names such as Dialog, Yinson and Serba Dinamik for investors who require exposure to the sector for their continued earnings growth delivery and balance sheet strength.
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