Petronas expected to increase prudency in spending – Kenanga Investment


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 which derived most of its 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 (Q3) 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 per cent 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 had shrunk 17 per cent quarter-on-quarter to RM61 billion in Q3 2020.

Year-to-date, the group’s net cash position has contracted a total of 25 per cent since end-2019 financial year.

“This is slightly alarming, especially considering that earlier this month it was announced that Petronas is set to pay an additional RM10 billion special dividend to the Federal Government, on top the ordinary dividends 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 dividends of RM24 billion, and RM2 billion of the RM10 billion special dividend.

The remainder RM8 billion is expected to be paid in the fourth quarter of 2020.

This marks the second consecutive year that Petronas was asked to pay special dividends. Last year, Petronas had paid a special dividend of RM30 billion in the 2019 financial year, raising that year’s dividends 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 recommends 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 Bhd, with a stance to taking profit on any sizable gains within the next two to three months.