Malaysia Industry Focus

Malaysia Oil & Gas

Refer to important disclosures at the end of this report

DBS Group Research . Equity 17 Jan 2018

Turning positive KLCI : 1,826.03

 Healthier 2018 outlook; Brent crude oil price stays Analyst
above USD60/bbl mark Inani Rozidin+60 326043905
 Development along value chain; sign of recovery in inanirozidin@alliancedbs.com
global capex spending by oil majors but Malaysian job
flows will continue to be lacklustre
 Prefer stocks with exposure to production activities
and/or overseas footprint
 Top picks – Hibiscus, Bumi Armada and Wah Seong
STOCKS
Brent crude oil price has breached key psychological
12-mth
mark of US$60/bbl. We are turning optimistic on the
Price Mkt Cap Target Price Performance (%)
direction of oil prices, and our average Brent crude oil price RM US$m RM 3 mth 12 mth Rating
forecast for 2018 stands at US$60-65 per barrel (bbl). This is
supported by robust oil consumption demand, which coupled Sapura Energy 0.85 1,278 1.35 (42.9) (50.0) BUY
with OPEC’s adherence to production cuts and extension of Bumi Armada 0.85 1,251 0.95 17.4 36.3 BUY
the production cuts until end-2018 has led to steady global Serba Dinamik 3.45 1,163 3.60 27.8 N.A BUY
inventory drawdowns. This is a promising signal as far as HoldingsPetroleum
Hibiscus 1.12 436 1.48 52.4 128.6 BUY
market rebalancing is concerned and will continue to support a Berhad
Wah Seong Corp 1.26 246 1.90 34.0 51.8 BUY
Pantech Group 0.66 124 0.85 (6.4) 40.4 BUY
positive oil price trajectory hereon, as long as the supply side is
Dialog Group Bhd 2.64 3,757 2.40 19.5 68.2 HOLD
wilfully capped by market participants.
Source: AllianceDBS, Bloomberg Finance L.P.
Better contract flows in 2018.Global capex budgets are Closing price as of 16 Jan 2018
expected to remain resilient in 2018 and accelerate in 2019
albeit from a low base as oil price averages to the US$65/bbl
mark. Already, we are seeing signs of recovery along the value Sapura Energy :Integrated global O&G services provider with full
spectrum of capabilities across the O&G value chain
chain in 2018 for global offshore activities. Oil and gas service
providers with regional or global footprint are well poised to Bumi Armada :International oil & gas service provider specialising in
capitalise on this trend. That said, Petronas Activity Outlook FPSO, offshore support vessels and transport and installation services.
It is the fifth largest FPSO player in the world and an established OSV
report 2018-2020 paints a more sombre picture in Malaysia owner and operator, with extensive experience acr
despite improving tenders and awards in 2017, mainly driven
Serba Dinamik Holdings :Serba Dinamik is an energy services group
by Pan Malaysian contract awards (+63% y-o-y). Going
that provides engineering solutions to the oil and gas (O&G) and
forward, we expect local project flows to remain challenging power generation industries. It has presence in Malaysia, Indonesia,
albeit a few bright spots in marine vessels, offshore Qatar, UAE, KSA, Oman, Bahrain, India and Turkmenistan.
installations and fabrication.
Hibiscus Petroleum Berhad :Hibiscus Petroleum is Malaysia’s first listed
Prefer stocks with exposure to production activities and independent oil & gas exploration and production company. Its key
overseas footprint. Although oil & gas stocks with exposure activities are focused on growing its portfolio in the UK, Malaysia and
Australia.
to exploration and development activities offer the greatest
operational leverage when capex cycle improves, we prefer Wah Seong Corp :WSC is a globally integrated energy infrastructure
group. Its Oil&Gas division provides specialized pipe coating services
stocks with exposure to production activities which offer better
and EPCC specialities. Meanwhile, its industrial services division is
earnings visibility at this nascent stage of recovery. We also involved in renewable energy and infrastructure materials.
favour stocks with global or regional footprints which have
Pantech Group :Pantech trades and manufactures steel pipes, valves
better job prospects compared to pure Malaysian-based and fittings largely for the oil & gas onshore and offshore industry.
players. Our top picks are Hibiscus Petroleum which is the best
Dialog Group Bhd :Integrated specialist technical services provider for
Malaysian listed proxy to rising oil prices, Bumi Armada which
the oil, gas and petrochemical industry with long-term recurring
will see more tender activities for floating, production, storage income from tank terminal business
and offloading (FPSO) vessels on the horizon and Wah Seong
whose earnings are secured by Nord Stream 2 pipe-coating
job. We also have buy calls for Sapura Energy which is a large-
cap Malaysian proxy to rising oil prices, Serba Dinamik which
focuses on resilient operation & maintenance (O&M) activities
and Pantech which benefits from rising demand for pipes,
valves and fittings in RAPID.

ed: JS / sa:BC, PY, CS

 Industry Focus
Malaysia Oil & Gas

Crude oil price rebound OPEC production levels lower in 2017

mmbpd
35
Brent crude oil price has breached the key psychological mark
34
of US$60/bbl. The average Brent crude oil price in 2017 was
33
c.21% y-o-y higher atUS$54.7/bbl. We are turning optimistic
32
on the direction of oil prices, and our average Brent crude oil
31
price forecast for 2018 stands at US$60-65/bbl. This is
30
supported by robust oil consumption demand, which coupled
with OPEC’s adherence to production cuts and extension of 29

the production cuts until end 2018 has led to steady global 28

inventory drawdowns. According to OPEC estimates, global 27

Jul-13
Apr-13

Jul-16

Jul-17
Oct-13

Apr-14
Jul-14
Oct-14

Apr-15
Jul-15
Oct-15

Apr-16

Oct-16

Apr-17

Oct-17
Jan-13

Jan-14

Jan-15

Jan-16

Jan-17
inventories have fallen from 280 million barrels (mmbbls)
above the five-year average in May 2017 to 140mmbbls above
the five-year average in Oct 2017. Source: Bloomberg Finance L.P., AllianceDBS

WTI and Brent price trend IEA world oil production

USD/bbl mmbpd mmbpd
140 98 36

120 96 35

100 94 34

80 92 33

60 90 32

40 88 31

20 86 30

0 84 29
Apr-13

Jul-16
Jul-13

Jul-14

Jul-15
Jan-14
Apr-14

Apr-15

Apr-16

Apr-17
Jul-17
Oct-13

Oct-14

Oct-15

Oct-16

Oct-17
Jan-13

Jan-15

Jan-16

Jan-17
Apr-12

Jan-18
Oct-12

Apr-13

Oct-13

Apr-14

Oct-14

Apr-15

Oct-15

Apr-16

Jan-17
Oct-16

Apr-17

Oct-17
Jan-12

Jul-12

Jan-13

Jan-14

Jan-15

Jan-16
Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

WTI BRENT
IEA total oil production IEA total crude oil production - OPEC

Source: Bloomberg Finance LP, AllianceDBS Source: OPEC Monthly Oil Market Report (MOMR), IEA, AllianceDBS

OPEC members showed decent compliance to production cuts
in 2017. The OPEC countries involved in the production cuts
adhered closely to the agreed production cuts in 2017, though
the story has not been as smooth on the export front, where
Saudi efforts to cut exports have been undermined to a certain
extent by Iraq expanding its export capacity and Iran’s
impending nuclear deal and alleged relationship with
extremists in Yemen which has raised concerns globally. To
recall, in a landmark decision on 30 November 2016, OPEC
and non-OPEC countries had jointly agreed to cut production
by about 1.8m barrels per day (mmbpd) from October 2016
reference levels for a 6-month period over January-June 2017,
in an attempt to balance the oil market. This was further
extended to end-2018 in the last OPEC general meeting, as US
shale production staged a recovery since end-2016 and risked
inundating the market again. We believe however the
production cuts have filtered better into export cuts by 2H17.
Extending production cuts to end-2018. OPEC and non-OPEC oil
producers agreed on 30 Nov 2017 during a meeting in Vienna to
extend the current agreement of cutting oil output by 1.8mmbpd
to end-2018. The decision was taken amid unprecedented
unanimity between Saudi Arabia and Russia, two of the world’s
largest oil producers. The deal also places production caps for the
first time on Nigeria and Libya, which were exempt from the cuts
and this had resulted in an unexpected supply glut in the early
part of 2017. Thus, fewer supply side surprises are expected from
the OPEC and non-OPEC bloc in 2018.
OPEC and IEA have diverging views. OPEC and Russia eliminated
almost two-thirds of the global glut in 2017 as the former rivals
jointly restricted their crude production to offset a boom in US
shale oil. At the heart of the clash between market expectations
in 2018 is whether the alliance can deplete the rest of the
overhang without triggering a new flood of American shale. Both
the IEA and OPEC agree that the coalition cuts are working – this
has been evident in reducing world crude oil stocks.

Page 2
 Industry Focus
Malaysia Oil & Gas

Where they diverge is on what happens next. OPEC predicts re- Shale limits. There are signs that the US shale boom is slowing.
balancing will complete by late 2018. In contrast, the IEA sees Drillers may have reached the limits in terms of cutting costs and
inventories remaining steady as new supply growth surpasses boosting productivity, and investors are finally insisting that
gains in demand. Although both institutions project that demand profits are shared out rather than funnelled back into supply
for OPEC crude will be about 32.3mmbpd on average in growth. However, IEA believes OPEC continues to underestimate
1H2018, their views had drifted apart as 2017 progressed. OPEC the magnitude of the shale revolution. According to Bloomberg
expects it will need to pump about 34mmbpd in 2H2018, while New Energy Finance, American producers are rushing to lock in
the IEA sees a requirement of just 32.7mmbpd. revenues as WTI stabilises at USD60/bbl, enabling them to
finance a new wave of drilling. The possible resurgence of US
World oil demand vs supply shale drilling will continue to pose a threat to OPEC and non-
mbpd OPEC rebalancing efforts.
99
97 OECD world crude oil inventory
95 mb mb
3,200 1,900
93 3,100 1,800
91 3,000
1,700
2,900
89 1,600
2,800
87 2,700 1,500
85 2,600 1,400
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17

4Q18*
1Q18*
2Q18*
3Q18*

2,500
1,300
2,400
2,300 1,200
World oil supply World oil demand
2,200 1,100
Source: OPEC Monthly Oil Market Report (MOMR), IEA, AllianceDBS
Jan-13

Jan-14

Jan-15

Jul-15

Jan-16

Jan-17
Apr-16
Apr-13
Jul-13

Apr-14
Jul-14

Apr-15

Jul-16

Apr-17
Jul-17
Oct-17
Oct-13

Oct-14

Oct-15

Oct-16
*OPEC estimates
OECD world commercial oil stocks (LHS) OECD world crude oil stocks (RHS)

Inventory drawdowns will continue to support oil price. Source: OPEC Monthly Oil Market Report (MOMR),IEA, AllianceDBS
Market sentiment improved in 2017 and global inventory
drawdowns – as evidenced by OECD world inventory numbers US crude oil inventory
– picked up in 2H17. Inventory declined and normalised mmbbls
steadily in 2017 as opposed to inventory buildup in 2016, and 600

the latest world commercial oil inventory reading of 2,948 550

mmbbls as of end-October 2017 is 3% lower than the 500

corresponding number in 2016. OECD world commercial oil 450

stocks fell by 37.3 mmbbls for the third consecutive month in 400
October 2017. Within the components, crude and product 350
stocks fell by 11.4 mmbbls and 25.9 mmbbls m-o-m 300
respectively. By regions, OECD Americas fell by 44.1 mmbbls, 250
while OECD Europe and OECD Asia Pacific rose by 5.3 mmbbls 200
Apr-13

Apr-14

Apr-15

Apr-16

Apr-17
Jul-13

Jul-14

Jul-15

Jul-16

Jul-17
Oct-13

Oct-14

Oct-15

Oct-16

Oct-17
Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

and 1.5 mmbbls, respectively. It should be noted that the stock

surplus had reduced by 16 mmbbls from a month earlier and
by 202 mmbbls from January 2017. This is a promising signal Source: Bloomberg Finance L.P, AllianceDBS
as far as market rebalancing is concerned and will continue to
support a positive oil price trajectory hereon, as long as the
supply side is wilfully capped by market participants.

Page 3
 Industry Focus
Malaysia Oil & Gas

Sign of recovery in global capex spending
Signs of improvement along the value chain. Global capex
budgets for upstream activities have been cut substantially
since the onset of the oil price collapse in 2014. Capex
budgets for 2015 and 2016 were slashed by an average of
about 25% each year. However, a 53% upswing in US shale
investment and resilient spending in large producing regions
like the Middle East and Russia led nominal upstream
investment to bounce back by 6% in 2017. Spending is also
rising in Mexico following a very successful offshore bid round
in 2017. Global upstream capex budgets are expected to
remain resilient in 2018 and accelerate in 2019. Already, we
are seeing nascent signs of recovery along the value chain in
2018 for offshore activities – more active tenders, rebound in
asset utilisation such as jack-up rigs and offshore support
vessels (OSV), and higher enquiries for global production
related platforms. According to Rystad Energy DCube (Dec
2017), total global offshore capex is expected to bottom out in
2018 and will progressively improve from 2019.
Current under-investment trend points to longer-term price
normalisation. We believe capex cuts in 2014-2016 will pave
the way for higher oil prices in the longer term. The final
investment decisions (FIDs) on 68 large projects globally
totalling USD380bn in capital expenditures were deferred since
crude prices started to plunge in 2014, according to a report
by research and consultancy firm Wood Mackenzie. These
deferrals and capex cuts will not necessarily translate into
significantly lower production in the near term as most
productive projects will likely go ahead. The Wood Mackenzie
report finds that the FIDs on many of the projects have been
pushed back with production start-ups slated for 2020-2023.
By 2021, deferred liquids volumes will reach 1.5 mmbpd,
Wood Mackenzie projects, rising sharply to 2.9 mmbpd by
2025. The impact on supply is thus, more acutely felt in the
medium term as it typically takes 5-7 years to bring a
greenfield conventional project into commercial production.
Capex outlook in Malaysia remains lacklustre

Global upstream capex trend Sombre picture from Petronas Activity Outlook 2018-2020.
USD'bn Petronas signals monotonous demand growth for majority of its
900 upstream services over the next three years (2018-2020). Cost
800 optimisation remains a top priority despite the recent recovery in
700 the price of crude oil. Petronas said in its Activity Outlook 2018-
600 2020 report that the requirement for jack-up rigs used in
500 exploration and development activities will be raised marginally
400 to 7-10 rigs in 2018 as compared to 6-9 rigs in its earlier Activity
300 Outlook 2017-2019 report. This is half of the peak of20 rigs
200 during 2013-2014. Demand for jack-up rigs over the medium
100 term (post 2020) will likely remain stable at current level.
0
2010 2011 2012 2013 2014 2015 2016 2017
Bright spots are increased demand for wellhead platforms
Source: OECD/IEA (WHP) and heavylift barge for the installation of these WHP
not only in 2018 but also over the medium term. But this is at
Global offshore capex trend the expense of demand for central processing platforms (CPP)
USD'bn as Petronas remains prudent in its spending and prefer to opt
300
249 for WHP with tie-in to existing nearby facilities. Within the
250 224 offshore support vessels (OSV) space, demand for fast crew
33 204 205
185 184 34 boats will pick up as it is a more cost effective means of
200 173 26
31
86 28
26
25 transport as compared to choppers. Besides that, overall
150 67 72
66 activity plans remain largely unchanged from the previous
57 54 59
100 activity outlook report for 2017-2019. Some of the works
130 112 118 meant for 2017/2018 have likely been deferred to the
50 107 100 93 100
2018/2019 horizon. Given that the local industry (with >2k
0
2015 2016 2017 2018 2019 2020 2021 vendors and suppliers) is still seeing overcapacity, only selective
Shallow Deep water Ultra deepwater Total oil & gas service providers will benefit from the new contracts,
which will at best allow them to replenish their existing
Source: Rystad Energy Dcube (Dec 2017) orderbooks.

Page 4
 Industry Focus
Malaysia Oil & Gas

In the local fabrication space, we view Sapura Energy and
Malaysia Marine and Heavy Engineering (MMHE) to be the key
players to secure more new fabrication contracts. UMW Oil &
Gas (UMWOG) is a key beneficiary to meet Petronas’ local
jack-up rig requirements. For OSVs, players like Icon Offshore
and Alam Maritim could benefit to some extent from slightly
higher marine vessel demand. Marine vessels include anchor
handling tug supply vessels (AHTS), platform supply vessels
(PSV), and fast crew boats (FCB). Local topside maintenance
contractors such as Sapura Energy, Dayang, Deleum, Carimin,
and Petra Energy could benefit from the increased
requirements for topside maintenance namely 1) man-hours,
Petronas Activity Outlook 2018-2020
2) maintenance, construction and modification (MCM), and 3)
hook-up commissioning (HUC) works.
In downstream activity, the number of man-hours required for
plant turnaround has been trimmed by 9%/48% for
2018/2019 to 4.3m/3.5m man hours. Nonetheless, the
medium term outlook (post 2020) is positive with anticipated
substantial increase in turnaround activity to cater for
Pengerang Integrated Complex (PIC), due to the large size of
its operations. PIC project is scheduled to come online by
2019, and turnaround activities will kick-start around 2022
onwards. Dialog and Serba Dinamik are key beneficiaries of
higher demand for plant maintenance.

New hydrocarbon 2018-2020 2017-2019 Medium Term

Activity phase Key listed beneficiaries
projects Outlook Outlook Outlook (post 2020)
c.20 (30% oil
Greenfield projects 10-15 ↑ Sapura Energy, MMHE
projects)
c.30 (75% oil Sapura Energy, Deleum,
Brownfield projects 20-25 ↑
projects) Scomi, Uzma
Upstream activity (by Medium Term
2018 Outlook 2018 Outlook Activity phase Key listed beneficiaries
category) Outlook (post 2020)
7-10 Jackup rigs 6-9 Jackup rigs ↔ Exploration,
Drilling Rigs & HWUs 2-3 TADRs 2 TADRs ↔ development, UMWOG, Perisai
production
3 HWUs N/A ↓
11-13 WHPs 8-10 WHPs ↑
Offshore Fabrications Development Sapura Energy, MMHE
1 CPP 2 CPPs ↓
100-110km
N/A
Carbon Steel
Linepipes (Rigid) ↔ Development Wah Seong
40km Corrosion
N/A
Resistant Alloy
2-3 projects for 2 projects for
heavylift barge heavylift barge ↑ Sapura Energy, Alam,
Offshore Installations Development
1-2 projects for 1 project for Barakah
pipelay barge pipelay barge ↔
4m man-hours for 2-3m man-hours
Sapura Energy, Dayang,
HUC for HUC Development and
HUC & MCM ↔ Deleum, Carimin, Petra
15m man-hours 10-12m man- production
Energy
for MCM hours for MCM
Floating Offshore
1 Aframax FSO 1 FPSO ↓ Development MISC, Yinson
Facilities
18-24 vessels for 15-20 vessels for
AHTS >100MT AHTS >100MT ↔
46 vessels for 25-30 vessels for
↔ Exploration, Icon Offshore, Alam
AHTS=<100MT AHTS=<100MT
Marine Vessels development, Maritim, Nam Cheong,
27-30 vessels for 25-35 vessels for production
↔ Perdana
PSVs/SSVs PSVs/SSVs
59-62 vessels for 40-50 vessels for
FCBs FCBs ↑
2018-2020 2017-2019 Medium Term
Downstream activity Activity phase Key listed beneficiaries
Outlook Outlook Outlook (post 2020)
2018 – 4.3m 2018 – 4.7
Plant turnaround (No. of
man-hours) 2019 -3.5m 2019 -6.7 ↑ Operations Dialog, Serba Dinamik
2020- 1.6m N/A
Note: Refer to page 10 for abbreviations used
Source: Petronas

Page 5
 Industry Focus
Malaysia Oil & Gas

Petronas quarterly capex Earnings prospects improving from a low base

RM'bn
25.0
Selective earnings rebound in 2017. Excluding Sapura Energy,
20.0
6.4 all stocks under our coverage reported stronger earnings
15.0
2.9
growth in CY2017. We expect this momentum to continue in
2.8 9.3 3.0
10.0 6.7 5.5 19.7 17.9 2.3 1.9
1.0 2.8 CY2018, supported by 1) higher demand from improved
1.3
15.5
10.6
15.0
10.9 11.6 10.9 market sentiment on the back of a recovery in oil prices, 2)
8.1 9.7
5.0 9.0 8.8
6.2 7.1 6.6 improvement in upstream activities leading to more contract
-
flows, and 3) further development in the refinery and
Domestic International
petrochemical integrated development (RAPID) projects.
Although Sapura Energy is expected to be loss making in FY18
Source: Petronas (FYE Jan), we believe recent share price weakness has priced in
such negatives. Earnings prospect from FY19 should improve,
Better global contract flow in 2018. New tenders and supported by its exploration and construction (E&C) segment
contracts secured by Malaysian listed oil & gas service which will offset its loss making drilling segment. In addition,
providers have improved over 2017(+63% y-o-y), mainly potential better-than-expected job flows given the improved
driven by the Pan Malaysian contract awards. However, Pan oil prices could further boost its future prospect.
Malaysia is an umbrella contract – similar to a letter of
undertaking with specified budget and time frame. With the Fully diluted core EPS (sen)
previous umbrella contract expired in 2016, the awards in Stock CY2016 CY2017F CY2018F CY2019F
Sapura Energy 2.1 -2.7 2.3 6.4
2017 are akin to contract renewals for the incumbents. Bumi Armada -11.3 6.6 9.4 10.6
Excluding Pan Malaysia awards, 2017 contract wins grew by Serba Dinamik 18.9 22.8 28.7 35.4
54% y-o-y with equal distribution from local and overseas Hibiscus Petroleum -5.8 4.6 11.2 16.2
contributions (local contracts grew by 70% y-o-y and overseas Wah Seong -3.0 10.9 15.9 16.6
Pantech 4.2 5.9 6.9 7.5
contract grew by 41% y-o-y). Going forward, we expect local Dialog 6.2 7.0 7.8 9.0
jobflows to remain challenging albeit a few bright spots in
Source: Company, AllianceDBS
marine vessels, offshore installations and fabrication.
Nonetheless, we expect the growth momentum to continue in Fully diluted core EPS growth (% y-o-y)
2018 reinforced by more active bidding for new jobs currently Stock CY2016 CY2017F CY2018F CY2019F
taking place in the global market given the improved Sapura Energy 121% -229% 184% 184%
conditions. Bumi Armada -120% 688% 41% 13%
Serba Dinamik 61% 21% 26% 23%
Hibiscus Petroleum 49% 179% 146% 44%
Malaysia O&G contract flow Wah Seong -203% 461% 47% 4%
RM'm
18000 Pantech -22% 42% 17% 8%
16,242 16,082
16000 14,512
Dialog 13% 13% 10% 16%
14000
12000 11,570 Source: Company, AllianceDBS
10000 8,526 7,983
8000 7,189 7,168
5,538 5,988 5,919
6000 4,484 4,202
4000 3,539 4,230 3,833
2,239 2,948 3,187
2,317 2,223 2,180
540 981 1,601 1,716 1,491
2000 1,020 1,131
460 36
0
4Q11

3Q14

2Q17
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11

1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14

4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17

3Q17
4Q17

Malaysia contract (RM'm) Overseas contract (RM'm) Total

Source: Bursa Malaysia, AllianceDBS

Page 6
 Industry Focus
Malaysia Oil & Gas

Key risks Slower than expected contract flow. Majority of local oil and
gas players are anticipating improved contract awards in 2018,
Inability to finance new projects. Oil & gas companies may face which is a re-rating catalyst and should help swing earnings to
difficulties in securing debt funding to undertake new projects, the black. Delay in contract awards is detrimental to the local
no thanks to the sector’s challenging operating conditions and oil and gas industry.
recent high default rates. In our stock universe, we note that
net gearing levels for the majority of stocks are at healthy Vulnerable to weakening of oil price. Local oil and gas players’
levels except for Sapura Energy, Bumi Armada and Wah earnings are directly or indirectly correlated to oil prices. This
Seong. That said, we believe the net gearing for Wah Seong makes it susceptible to oil price volatility.
and Bumi Armada will improve steadily going forward.
Volatility in USD exchange rate. Any further strengthening of
Financial health MYR would negatively affect earnings of some players as
Net gearing Current EBITDA / majority of sales are denominated in USD. A stronger MYR to
Stock
ratio interest
Sapura Energy 1.26x 1.06x 3.1x USD will lower its absolute revenue in MYR, and as such lower
Bumi Armada 1.84x 1.04x 6.4x its earnings.
Serba Dinamik 0.25x 1.87x 9.7x
Hibiscus Petroleum nm 1.01x 7.4x
Wah Seong 1.00x 1.06x 6.9x
Pantech 0.21x 2.39x 8.8x
Dialog nm 1.51x 14.3x
Note: Net gearing and current ratio are based on latest financial
quarter while EBITDA/interest is based on latest financial year
Source: AllianceDBS

Wah Seong : The company is seeking to divest non-core assets

to lower its gearing level and generate cashflow for working
capital. This will put Wah Seong in a better position to
undertake more projects going forward.

Bumi Armada: We expect its operating cash flow to improve

from FY17 onwards, with three FPSOs coming onstream that
should progressively reduce its gearing level. To lower its debt
commitment, management will look for JV partnership for
new FPSO projects going forward.

Sapura Energy: We expect its net gearing level to remain at the

current level with the group planning for capex on
maintenance and development of gas fields to the tune of
c.RM800m per annum. The capex will be funded by internally
generated cash.

Page 7

Valuation & Stock Picks
 Hibiscus Petroleum (BUY; TP: RM1.45) is a pure oil & gas
exploration and production player. As such, it is the best
Malaysian-listed proxy to rising oil prices. The completion
of the acquisition of Anasuria Cluster in Mar 2016 had led
a turnaround from a core net loss of RM145m in FY16
(FYE Jun) to core net profit of RM29m in FY17. The
impending completion of the acquisition of North Sabah
EOR PSC, estimated by end 1QCY18, will more than
double its earnings in FY19. Recent enhancement works
on Anasuria Cluster and oil price rebound are further
icings on the cake which gives strong support to our core
EPS (fully diluted) CAGR of 29% from FY17-20F.
 Bumi Armada (BUY; TP: RM0.95) is attractive at its current
valuation which has priced in most negatives. The loss-
making OSV segment should improve going forward as its
utilisation rate has stabilised at 53% in 3Q17 while OSV-
to-rig ratios should improve in 2018, supported by
improvements in the global working rig count which will
drive a recovery in OSV utilisation and day rates. Its FPSO
business should also see better days ahead following the
deployment of Armada Olombendo and Kraken FPSO.
The eventual full production ramp-up by Kraken FPSO in
1H18 should further re-rate this stock. Further, we are
also seeing more new tender activities for FPSO, which is
positive for Bumi Armada.
 Wah Seong (BUY; TP RM1.90) is poised for an earnings
rebound after two years in the doldrums due to the
collapse in crude oil prices and dwindling order book. The
turnaround was set in motion following the award of a
EUR600m (RM3bn) pipe-coating job for the Nord Stream
2 (NS2) project. On the back of a total orderbook of
RM3.5bn, we forecast an EPS CAGR of 23% for FY17-
FY19F. We like Wah Seong as its earnings are secured
until end-2019. Moreover, with more stable crude oil
prices, demand for pipe-coating and engineering services
for the oil & gas sector should improve going forward.
 Sapura Energy (BUY; TP: RM1.35) is expected to close
FY18 (FYE Jan) at a loss, mainly dragged by its drilling
segment. While we believe the operating environment
remains challenging, we do see some room for
improvement in FY19, particularly in the engineering and
construction (E&C) segment. Sapura Energy’s orderbook
stood at RM15.1bn as at end-3QFY18, which will provide
earnings visibility until FY20.Following the recovery in oil
prices, we expect more jobs to filter through from FY19
onwards as the capex spending cycle in the industry has
bottomed. New tenders and contracts improved during
CY2017, mainly driven by Pan Malaysia contract awards.
We expect this growth momentum to continue in 2018
Industry Focus
Malaysia Oil & Gas
on more active bidding for new jobs in the market given
the improved conditions.
 Serba Dinamik (BUY; TP RM3.60)’s focus on O&M
activities that have proven to be resilient even during the
low crude oil price environment. Serba’s geographical
diversification also mitigates geopolitical risks. We
conservatively forecast Serba’s EPS CAGR at 23% over
FY16-FY19F, underpinned by increased demand for O&M
services as oil prices recover and stabilise, which would
result in higher activity levels across the O&G and power-
generation industries.
 Pantech (BUY; TP: RM0.85)’s earnings rebound
momentum should persist in 2HFY18 (FYE Feb),
underpinned by more orders from RAPID. Pantech has a
dominant local market share of 40% in the supply of
pipes, valves and fittings (PVF). Coupled with its move to
set up a warehouse in Pengerang and a galvanising plant
in Tanjung Langsat, we believe Pantech is well positioned
to benefit from more RAPID orders. Beyond strong
organic growth, Pantech is also on a lookout for earnings
accretive M&As given its strong balance sheet. Its
valuation is attractive at 10x FY18F FD EPS. Pantech also
offers one of the highest dividend yields in our oil & gas
universe at c.5%.
 Dialog (HOLD; TP: RM2.40) is set to strengthen its long-
term recurring income business through its tank terminal
expansion in Pengerang Deepwater Terminal (PDT) within
Pengerang Integrated Petroleum Complex (PIPC). Its long-
term expansion progress is promising and we see huge
potential in the overall Petronas RAPID project, as it is set
to become a regional downstream oil storage and trading
hub. Furthermore, we foresee positive developments in
the upstream segment in light of the stabilisation of
global crude oil prices and eventual recovery of oil majors’
capex cycle. However, we think that these developments
are already reflected in the share price. As such, Dialog’s
share price is expected to hover at this level for now due
to lack of catalysts. The next re-rating catalyst for Dialog
will be announcements of new projects beyond
Pengerang Phase 1 and 2.
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Peers comparison (as at 12 Jan 2018)

EPS (FD) Growth Price/ Dividend Net Corr to Corr to
P/E (FD) ROE
(YoY) BVPS Yield Gearing Brent USDMYR
Target Current Mkt Cap
Call CY2018 CY2019 CY2018 CY2019 CY2018 CY2018 CY2018 CY2018
Price (LC) Price (LC) (RM m)
Dialog Group HOLD 2.40 2.67 14,828.7 14% 13% 34x 30x 4.3x 1% 12% 0.1x -40% -53%
Sapura Energy* BUY 1.35 0.90 5,333.0 -143% -121% 40x 14x 0.4x 0% 1% 0.1x 79% 76%
Bumi Armada* BUY 0.95 0.86 5,074.3 -207% 705% 9x 8x 0.8x 3% 9% 0.1x 95% 94%
Serba Dinamik* BUY 3.60 3.44 4,552.4 145% 61% 12x 10x 3.2x 3% 27% 0.1x 78% 91%
Hibiscus Petroleum* BUY 1.48 1.12 1,744.6 148% -49% 10x 7x 1.5x 0% 15% 0.1x 95% 89%
Wah Seong Corp* BUY 1.90 1.30 989.2 -84% -203% 8x 8x 1.1x 4% 12% 0.1x 92% 91%
Pantech Group* BUY 0.85 0.68 498.2 -11% -22% 10x 9x 0.9x 4% 9% 0.1x 81% 75%

Total / weighted avg 33,020.5 -24% 94% 26x 19x 2.7x 2% 12% 0.1x 29% 24%
Total small-mid cap 18,191.8 -54% 160% 19x 10x 1.4x 2% 12% 0.1x 86% 87%

Sources: AllianceDBS, Bloomberg Finance L.P

* Small-mid cap stocks

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Abbreviation

Term Decription
AHTS Anchor Handling Tug Supply
bbl Barrel
boe Barrel of oil equivalent
CPP Central Processing Platforms
FCB Fast Crew Boats
FPSO Floating Production Storage and Offloading
FSO Floating Storage and Offloading
HUC Hook-Up & Commissioning
HWU Hydraulic Workover Units
MCM Maintenance, Construction & Modification
mmbbl One million barrels
mmbpd Million barrels of oil per day
mmstb Million stock tank barrels
PSV Platform Supply Vessels
RAPID Refinery and petrochemical integrated development project
SSV Straight Supply Vessels
TADR Tender Assisted Drilling Rigs
WHP Wellhead Platforms

Sources: AllianceDBS

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AllianceDBS recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends

Completed Date: 17 Jan 2018 07:59:15(MYT)

Dissemination Date: 17 Jan 201808:01:17(MYT)

Sources for all charts and tables are AllianceDBSunless otherwise specified.

GENERAL DISCLOSURE/DISCLAIMER
This report is prepared by AllianceDBS Research Sdn Bhd (''AllianceDBS''). This report is solely intended for the clients of DBS Bank Ltd, its
respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in
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The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS
Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,
the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other
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The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and
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(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and
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Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)
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commodity referred to in this report.

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DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public
offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage
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The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the
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2
his associate does not have financial interests in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has
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Compensation for investment banking services:

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Disclosure of previous investment recommendation produced:

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investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12
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An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of
1

which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person
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Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a
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Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

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For any query regarding the materials herein, please contact Paul Yong (CE. No. ASE988) at equityresearch@dbs.com.

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Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd.

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United This report is produced by AllianceDBS Research Sdn Bhd which is regulated by the Securities Commission Malaysia.
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DBS Regional Research Offices

HONG KONG MALAYSIA SINGAPORE

DBS Vickers (Hong Kong) Ltd AllianceDBS Research Sdn Bhd DBS Bank Ltd
Contact: Paul Yong Contact: Wong Ming Tek (128540 U) Contact: Janice Chua
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