Petronas expected to increase prudence in spending — Kenanga

TheEdge Mon, Nov 30, 2020 05:00pm - 1 month ago

KUALA LUMPUR (Nov 30): Petroliam Nasional Bhd (Petronas) is seen increasing prudence in spending going forward amid mildly declining balance sheet, earnings, as well as increased dividend payment commitment, Kenanga Investment Bank said today.

It said this would then lead to lower activity levels and would be most impactful to local-centric contractors that derive most of their earnings in Malaysia such as Dayang Enterprise Holdings Bhd, Uzma Bhd, and Velesto Energy Bhd.

"Nonetheless, we also acknowledge that fundamentals for the global oil market are still weak at the moment, and internationally exposed players are also expected to see overall weaker activities for the time being," it said in its research note today.

Petronas posted a net loss of RM3.4 billion for the third quarter of financial year 2020 (3QFY20) ended Sept 30, 2020, compared with a net profit of RM7.4 billion in the same quarter last year, due to lower earnings before interest, taxes, depreciation, and amortisation.

Higher impairment loss on assets and higher tax expenses attributed to the derecognition of deferred tax assets, primarily as a result of lower oil and gas prices outlook, also affected its financial performance.

The group recorded revenue of RM41.1 billion, down 25% from RM55.1 billion in the corresponding quarter last year, mainly due to lower average realised prices for major products.

Kenanga noted that Petronas' net cash position shrank 17% quarter-on-quarter to RM61 billion in 3QFY20.

Year-to-date, the group's net cash position has contracted a total of 25% since end of FY19.

"This is slightly alarming, especially considering that earlier this month it was announced that Petronas was set to pay an additional RM10 billion special dividend to the federal government, on top of the ordinary dividend of RM24 billion, in efforts to combat the challenges caused by the Covid-19 pandemic," Kenanga said.

It said Petronas had already fully paid the ordinary dividend of RM24 billion, as well as RM2 billion of the RM10 billion special dividend.

The remaining RM8 billion is expected to be paid in 4QFY20.

This marks the second consecutive year that Petronas is asked to pay special dividend. Last year, Petronas paid a special dividend of RM30 billion, raising that year's dividend to RM54 billion, it said.

"We believe that continued commitment to higher dividends may hamper the recovery of the sector locally, especially considering the global trend of lowering dividends among other international oil majors," it said.

Kenanga is maintaining a neutral call, although, in a recovery trajectory, the pace of recovery is expected to largely be slow and gradual as fundamentals of the sector are still weak.

"As such, we do not expect to see activity levels returning to 2019-level at least until 2023," it said.

That said, Kenanga recommended keen investors to adopt a trading approach towards the sector (in contrast to a fundamentally driven investment strategy), favouring names with historically high standard deviations to capitalise on the current sentiment boost following positive news flow of Covid-19 vaccine development recently.

Kenanga said its trading picks included Uzma, Dayang, and Malaysia Marine and Heavy Engineering Holdings Bhd, with a stance to taking profit on any sizable gains within the next two to three months.

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