KUALA LUMPUR: Petroliam Nasional Bhd's (Petronas) lower dividend payout to the government this year is expected to benefit the local oil and gas services and equipment (OGSE) sector, said Hong leong Investment Bank (HLIB).
Petronas dished out RM40 billion of dividends to the Malaysian government in 2023 (vs RM50bn in 2022) and is expected to payout RM32 billion in 2024. HLIB deemed the anticipated decline in dividends a positive as it provides Petronas greater headroom to spend on capital expenditure (capex), and potentially benefit the local OGSE sector.
The bank said Petronas has been ramping up its domestic capex to RM26 billion in 2023, bolstered by spending on the Near-shore Floating LNG project in Sabah and Kasawari Gas Field and CO2 Facilities in Sarawak.
"In our opinion, the increase was also partly contributed by higher allocation for exploration, production and maintenance works for its assets due to extensive backlogs accumulated over the past few years. "We believe domestic capex especially for upstream will remain supportive for local OGSE players, taking cue from the latest Petronas Activity Outlook. "Following a miss in capex target in 2023, Petronas will have to catch up on its capex spending in the coming years, at least at RM60 billion per annum (p.a)," it said.
Overall, HLIB stayed Overweight on the oil & gas (O&G) sector, premised on elevated oil price supported by continued production cuts from Petroleum Exporting Countries (OPEC) and heightened geopolitical tensions, as well as slowing output growth from Brazil and the US.
The bank also expects rising upstream activities around the globe and Petronas' capex drive to sustain local production, will continue to benefit local OGSE players.
"Our top picks for the sector are Armada Group Bhd due to its undemanding valuation in anticipation of bumper earnings forecast in the financial year 2024 (FY24) as contribution from Armada Sterling V sets in and Hibiscus Petroleum Bhd given its strong foothold in upstream O&G production, enabling the stock to fully benefit from a high oil price environment. "We remove Wasco Bhd as one of our top picks due to the recent rally of its share price, but replace it with Dialog Group Bhd as we expect sequential earnings recovery in the coming quarters driven by lapse of legacy engineering, procurement, construction and commissioning (EPCC) contracts bolstering margin expansion," it added.