KUALA LUMPUR: Shares in Petronas Dagangan Bhd (PetDag), Petronas Gas Bhd (PetGas), and Petronas Chemicals Group Bhd (PChem) have retreated 12%, 16%, and 22% respectively this year, against the 4.8% decline in the benchmark FBM KLCI index.

The three counters have all erased their 2018 gains. But that has not translated into renewed buying interests, amid doubt towards their earnings prospects in the medium term.

“I think each has its own set of problems,” said one analyst with a local bank who covers the oil and gas (O&G) sector. “PChem is dragged by weak petrochemical prices, there is fear of lower returns for PetGas in RP1 (Regulatory Period 2020-2022), and poor results for PetDag coming from inventory movement or higher operating expenditures,” the analyst commented.

Downstream in downcycle

PChem has announced its financial results for the period ended June 30, 2019 (1HFY19) — where core net profit of RM1.92 billion stood at 48% of consensus full-year estimates.

TA Research analyst Kylie Chan pointed in her Aug 14 report that the results were commendable considering the tough petrochemicals market.

Chan, who has a buy call of RM8.70 on the stock, opined that PChem trumps its regional peers “given its cheap gas feedstock advantage, superior balance sheet, and capacity expansion at Rapid (Pengerang Refinery and Petrochemical Integrated Development )”.

CGS-CIMB Research analyst Raymond Yap, however, discounted PChem’s long-term outlook from the capacity expansion as “initial earnings will probably be low, given that it will still be in the process of ramping up in its first full year of operations”.

Yap in his note justified his lower target price of RM7.39 “in view of the challenging price outlook for petrochemical products and the weak investor sentiment”.

Regionally, petrochemical companies’ valuation averaged at eight times enterprise value over earnings before interest, taxes, depreciation and amortisation (EV/Ebitda) estimates. In PChem’s case, its multiple varies among analysts, while full-year Ebitda hinges on average product selling prices and volume.

It is understood that higher volume from China amid the ongoing Sino-US trade war mitigated impact of lower average selling prices of petrochemical products for PChem in 1HFY19.

PChem reportedly expressed that its utilisation rate would remain high at 90% in the period despite heavy plant turnaround activities scheduled for the third quarter — but that remains to be seen.

Of the 19 analysts covering PChem, all but two have higher target prices compared to its current share price. The stock has seven buy calls, nine hold calls and three sell calls. Analysts’ target prices range from RM6.65 to RM9.89, with the average at RM8.07. The stock closed at RM7.22 last Friday.

On PetDag, concerns stem from higher operating expenses. Aggressive marketing continues, and its payment app Setel — part of its ongoing digitalisation push — is still finding its footing in the Klang Valley.

PetDag has achieved year-on-year growth in both retail and commercial fuel sales in 1H19. It launched a new Primax 95 this year, opened new and refurbished existing retail stations. Meanwhile, it sold more jet fuel to make up for lower diesel sales.

However, its second quarter’s (2Q) financial performance was not that impressive given the sharp fall in net profit. Last Friday, PetDag, which runs the largest petrol station chain, announced that its net profit fell 45% to RM172.75 million for 2QFY19 from RM424.26 million, despite a 4.5% rise in revenue to RM7.61 billion from RM7.28 billion a year ago.

Its operating profit margin shrank to 3.16% from 5.8% in the previous corresponding quarter no thanks to Means of Platts Singapore (MOPS) price declines, higher marketing spending, and the increase in depreciation and amortisation on the SETEL app, the group explained.

Amid the management’s intention to review its capital expenditure utilisation, the annual figure of up to RM500 million in 2019-2020 could lean heavily towards the digital push, although refurbishment of stations continues.

PetDag plans to expand in the east coast and Sabah and Sarawak, but investors could wait for a clearer strategy to increase non-fuel revenue to 30% of its total which is expected to be announced before year end.

For PetGas, a decision on the tariffs for gas transportation and regasification services in 2020-2022 under the Regulatory Period 1 (RP1) will be announced in 4Q19.

PetGas has guided that the tariffs would likely be similar to those in the pilot regulatory period in 2019, but industry watchers are not discounting the possibility of further cuts.

The tariff cut in the pilot period has already reduced operating profits for the two services by 23% and 9% year-on-year respectively in 1QFY19, although its overall performance was supported by higher contributions from the gas processing and utilities segments.

It is worth noting that PetGas’ finance costs crept to a high of RM60.25 million or 8.7% of operating profit in the quarter, compared with its average of RM42 million in FY18 and RM28 million in FY17. It has yet to announce its 2QFY19 results.

Amid possible earnings erosion from regulatory headwinds and costs, the counter closed at RM16 last Friday, compared with its average target price of RM16.67 among 12 analysts covering the stock.

Meanwhile Petronas’ shipping firm MISC Bhd has seen a turnaround of its petroleum segment in 1HFY19 thanks to better freight rates — something unexpected just a year ago.

However, AmInvestment Research analyst Alex Goh in his note dated Aug 14 quipped that “petroleum spot rates may begin to soften in 3QFY19” on seasonality.

On the other hand, the liquefied natural gas (LNG) spot rate is rebounding, and another pickup in petroleum segment demand in the fourth quarter could entail a stronger FY19 as a whole.

Despite the improved prospects, analysts took into account the 8.8% rally in MISC’s share price this year, resulting in 11 of 13 analysts opting to maintain a hold call on the counter. The target prices pegged by analysts are in the range of RM6.30 to RM8.38, compared with its last Friday’s closing of RM7.29.

Furthermore, there is also uncertainty stemming from the International Maritime Organization 2020 emission regulation that will be imposed on the shipping sector, with the overall impact on vessel supply — due to new builds and scrapping of non-compliant vessels — difficult to gauge. Meanwhile, it’s 66.5%-owned Malaysia Marine and Heavy Engineering Holdings Bhd (MMHE) is the outperformer among the five Petronas-linked stocks, in terms of share price performance.

The stock has leapt by 48.6% this year, with analysts largely expecting the net-cash company to turn around by FY20 on the back of its RM3 billion order book.

As the offshore fabrication firm is among a handful of O&G services companies with a healthy balance sheet, analysts see it as a strong candidate for future fabrication contracts.

“It is also aiming for the fast turnaround/volume game, modular fabrication opportunities to grow its order book. That can be realised from the Aramco tender (RM3 billion per annum),” said MayBank IB Research analyst Liaw Thong Jung, who has a buy of RM1.35 on MMHE.

Analysts’ calls are, however, mixed, with three buy calls, four hold calls and two sell calls with TPs of 58 sen to RM1.35 for an average of RM91 sen, compared to its last close of 81 sen.

Downside concerns stem from its ability to sustain the turnaround of its marine repair segment, and initial costs in the offshore segment for future works that could eat into overall profits in the short run.

It should be noted that the gains in MISC and MMHE are also an indirect result of the recovery in Brent crude oil prices in 1H19 after the sharp drop in the fourth quarter of 2018.

Nonetheless, the retreat in the third quarter to U$60 (RM251.40) per barrel range currently indicates that the oil market remains unstable — a food for thought to those eyeing to invest in the sector.