Top Five O&G companies in Malaysia that will benefit from rising oil prices

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Conventional wisdom states that rising oil prices are a headwind for the economy and the markets. However, it depends on the context.

The Bridgeway Capital investment firm tracked historic oil price increases and decreases, calculating how they impacted the U.S. market from 1946 to 2012. It turns out that when oil prices have fallen, the S&P 500 index has performed better, with a 16% rise, on average. But when oil prices rise, the S&P still rise 10% average. Again, it has to do with the degree of the price increases.

Looking deeper and Bridgeway found that when oil prices rise but don’t jump too high, then the market sees a 15.5% return, which is nearly in line with the market’s performance when oil prices fall.

Nevertheless, in the short run, rising oil prices are actually a boon for companies in the energy sector, their gains can improve the balance sheet where some of the losses that other companies could suffer later on. Energy companies within the S&P 500 index, in fact, are expected to see their corporate profits surge 42% in 2018, compared to a more modest 12% rise for broad market, according to FactSet.

In Malaysia, Petronas Gas will surely be in the top listed company that is benefited from the rising oil price. However, the price of RM17.20 is considerably high and also in terms of its relatively low volatility, it wouldn’t be suggested to ‘buy in’, especially for the short term or medium-term trade investors. Therefore, these are the top 5 pick energy sector companies recommended:

  1. Sapura Energy

According to the article of The Edge Financial Daily, the Maybank IB analyst Liaw Thong Jung suggested that the companies that have experienced impairments, and those who have cleaned up their balance sheet can fully benefit from the next upcycle, such as Sapura Energy Bhd.

On top of Sapura’s RM16 billion order book, it has been shortlisted as long-term contractors for Saudi Aramco. “[Sapura] has done everything accordingly and quickly,” said Liaw, referring to the steps it has taken to pare debts, such as the crucial RM4 billion cash call — of which subscription rate is announced today — and the sale of 50% in its energy unit which raised RM3 billion cash and other related funds.

Therefore, it is suggested that the beat-up shares in companies who have readied themselves for the next cycle stand to gain the most.

  1. Serba Dinamik Holdings Bhd

In 2018, Serba Dinamik Holdings Bhd was one of only two gainers in The Edge Financial Daily’s portfolio of top picks. The oil and gas solution’s provider remained a bright spot on Bursa despite volatility in both the equity market and oil prices.

The share price has maintained its upward climb since its listing on Bursa in February 2017 at RM1.53. As at Dec 31, 2018, the counter had closed at RM3.78, up 17.4% over the past year and more than double its listing price.

Nevertheless, analysts are still upbeat on Serba Dinamik’s prospects. Ten Bloomberg analysts with an eye on the stock, all recommended Serba Dinamik as a “buy”, with an average 12-month TP of RM4.91.

“Prospects to grow its engineering, procurement, construction and commissioning segment remain promising, with ample hydropower and utilities projects up for grabs,” said Affin Hwang Capital in a report on Dec 26, 2018.

The earnings growth of the company is expected to be driven by its Terengganu water treatment plant and its overseas ventures, the research firm said. These include a 30-megawatt power plant in Laos, a contract with New Thunder Technical Services in the United Arab Emirates and a chlor-alkali plant the group is building in Tanzania via a joint venture.

Furthermore, Serba Dinamik recorded a 21.4% increase in net profit to RM278.61 million for 9MFY18 on the back of strong growth in its operation and maintenance activities. Revenue was up 20% year-on-year at RM2.31 billion for 9MFY18.

  1. Kelington Group Bhd

Kelington Group Bhd serves industries requiring ultra-high-purity gases and chemicals in specialised applications. Due to itd rather high barrier of entry in industries, Kelington who serves as a provider would need to have a good safety track record and trust among clients.

“We like Kelington as it has a proven business with multinational clients. The group’s financial year ending Dec 31, 2020 earnings growth will come from its new [liquid] carbon dioxide plant [in Kerteh, Terengganu], with a capacity of 50,000 tonnes. [The] break-even capacity is estimated at 30% and the company already has unofficial take-up of 30% to 40% for its capacity.

“Conservatively, we target [for Kelington’s] share price to grow 25%, mirroring its earnings growth,” he told The Edge Financial Daily.

The group also has a growing clientele in China, having clinched several contracts for ultra-high-purity gas works from global semiconductor giants there.

“Made in China 2025 is a key initiative to significantly increase [the] manufacturing capacity of memory chips and integrated circuits. This initiative has become even more urgent to China given the current trade war with the US.

Therefore, it is suggested that Kelington is set to benefit from this massive build-up of capacity regardless of [the] global outlook.

  1. Frontken Corp Bhd

Frontken Corp Bhd provides surface engineering services for the oil and gas (O&G), petrochemical, power generation, semiconductor and electronic manufacturing sectors.

The stock was a top pick among technology sector stocks by Hong Leong Investment Bank analyst Tan J Young in his Dec 19, 2018 report on the technology sector outlook for 2019.

“Frontken remains our top pick on the back of a bullish global semiconductor market outlook, a robust fabrication investment, leading-edge technology, a recovery in the O&G sector and a strong balance sheet,” stated in The Edge.

For the nine months ended Sept 30, 2018 (9MFY18), Frontken reported a 67.6% y-o-y increase in net profit to RM33.57 million, thanks to an improved performance of its subsidiaries in Taiwan, Singapore, Malaysia and the Philippines. Revenue for the period was up 10.3% to RM238.5 million from RM216.2 million for 9MFY17.

As of Sept 30, 2018, Frontken had a cash balance of RM119.55 million and total borrowings of RM12.83 million.

  1. Yinson Holdings Bhd

The floating, production, storage and offloading (FPSO) service provider Yinson Holdings Bhd is still a top pick for analysts.

Maybank Investment Bank Research analyst Liaw Thong Jung said in a 2019 outlook note on the O&G sector that Yinson is entrenched to leverage on the booming FPSO market.

“[The] global tender pipeline is strong with minimal competition. Securing one job win in 2019 is a near certainty, a catalyst [for Yinson],” he said.

Yinson is also a top stock pick for UOB Kay Hian, due to its competitiveness in the international FPSO space.

“We like Yinson for its execution track record, and as it is delivering the FPSO Helang contract for the Layang field [offshore Miri, Sarawak] in two years’ time,” the research firm said.

Nine out of 10 analysts covering Yinson have a “buy” call on the stock, with a consensus TP of RM5.12. Yinson shares have appreciated by 5% over the past year to close at RM4.20 on Monday.

For the cumulative nine months ended Oct 31, 2018 (9MFY19), Yinson reported a 24.5% decline in net profit to RM177.5 million from RM235.04 million a year ago, mainly due to a higher property, plant and equipment impairment loss. Revenue for 9MFY19 grew by 14.5% y-o-y to RM747.3 million due to bareboat chartering contributions from FPSO John Agyekum Kufuor.