Oil & Gas Sector: Overweight

SECTOR UPDATE
Monday, December 21, 2020

FBMKLCI: 1,652.49
THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY*
Oil & Gas Sector Overweight

Overweight on Looming Oil Demand Recovery (Maintained)
Kylie Chan Sze Zan Tel: +603-2167 9601 kyliechan@ta.com.my www.taonline.com.my
Whilst near-term supply-demand fundamentals remain weak, oil price downside is

cushioned by bullish sentiment. This is on the back of traction in vaccine deployment that
alludes to looming economic recovery. Furthermore, the former is accelerating at an
exuberant pace. Thus, oil fundamentals may catch up sooner-than-expected. Economic
recovery will rejuvenate demand for crude oil and natural gas, including its derivatives
(i.e. transportation fuels and petrochemicals). In turn, this will ramp up global
production, resulting in: (1) resumption of O&G capex spend and (2) higher requirements
for crude transportation. Correspondingly, demand will surge for tanker shipping, as
well as offshore fleet and services. Hence, this would catalyse a rebound in DCRs, fleet
utilization and new contract awards. As a result, the tide will turn for O&G contractors,
petrochemical producers and shipping players. Against this promising backdrop, we
reiterate Overweight on the sector.
Boost to Oil Price Sentiment from Early Vaccine Rollouts. News flow on Covid-19 (C-19)
vaccine breakthroughs has boosted sentiment on oil price (Figure 1). This optimism is in spite of
record high global daily cases of C-19. The positive oil price trajectory first started in early-
November following Pfizer/BioNTech’s announcement that its vaccine is more than 90% effective
based on preliminary data from Phase 3 trials. Thereafter, a flurry of rapid news flow surrounding
vaccine progress has fuelled oil price momentum. This includes news that Pfizer’s vaccine has been
successfully rolled out in the US and UK. On top of that, it has received worldwide approvals from
countries such as Canada, Saudi Arabia, Mexico, Singapore etc. The vaccine’s global rollout will be
further accelerated upon approvals from the European Union (target: 29 Dec), and India, etc. On
the back of this, Pfizer expects to produce up to 50mn vaccine doses globally in 2020, and up to
1.3bn in 2021. Meanwhile, Moderna’s vaccine has received approval from the US Food and Drug
Administration (FDA) and is now ready for rollout. We believe the above developments are
significant milestones that prelude looming oil price recovery.
Looming Economic Recovery will Propel Oil Demand… Although it is still early days, if we
extrapolate ahead, widespread distribution of vaccines will finally contain C-19 infections that have
brought economies to a standstill. In turn, re-opening of locked down economies will kickstart
global recovery. In particular, resumption of air and land travel will boost demand for transportation
fuels. Additionally, restoration of manufacturing output will catalyse demand for petrochemicals.
Hence, all this will propel demand for crude oil and natural gas. Rebound in crude demand (Figure
2) will lead to reversal of OPEC+ supply cuts and subsequent ramp up in global production. Even
at this early juncture, OPEC+ will start to scale back on output cuts. To recap, OPEC+ recently
announced gradual moderation of supply cuts (baseline production: Oct-18) by 2mn bpd to 5.7mn bpd
starting Jan-21 (Dec: 7.7mn bpd cuts). Therefore, Jan-21 output cut will adjust to 7.2mn bpd (MoM
production: +500k bpd). This will be followed by future monthly production cuts (Appendix 1) not
exceeding 500k bpd.
Page 1 of 24
21-Dec-20
Figure 1: Brent Crude Oil Price Figure 2: Global Oil Demand
90
105
80
100
Global Demand (mn bod)

70
95
60
USD/bbl
90
50 85
40 80
75
30
70
20
Jan-19
Mar-19
May-19
Sep-19
Nov-19
Jan-20
Mar-20
May-20
Sep-20
Nov-20
Jan-21
Mar-21
May-21
Sep-21
Nov-21
Jul-19
Jul-20
Jul-21
Jan-17
Mar-17
May-17
Jul-17
Sep-17
Nov-17
Jan-18
Mar-18
May-18
Jul-18
Sep-18
Nov-18
Jan-19
Mar-19
May-19
Jul-19
Sep-19
Nov-19
Jan-20
Mar-20
May-20
Jul-20
Sep-20
Nov-20
Source: Bloomberg, TA Securities Source: EIA, TA Securities
… But Needs to Jump Through Multiple Hoops First. On the flipside, there are multiple
vaccine hurdles to overcome before containment of the pandemic. This includes: (1) manufacture
and widespread global distribution, (2) feasible storage and logistics solutions in developing and
third world countries, (3) population willingness to accept inoculation, and (4) efficacy across all
age groups and longevity of immunity, etc. Using the US as a benchmark. the impact of the Pfizer
vaccine in reducing the rate of infections will likely materialize by mid-to-end March. This is
according to BioNTech CEO, Ugur Sahin, and Dr. Anthony Fauci, US Senior Official for Infectious
Diseases. Additionally, Fauci predicts that the US could achieve early stages of herd immunity by
late spring or summer. He added that the vaccine’s impact will start to manifest upon achieving
50% population penetration. However, a rate of 75%-85% is required to achieve the blanket of
herd immunity. Additionally, Sahin is optimistic that the vaccine’s immunisation effect would last
for a year. However, at this juncture, there is insufficient scientific data to ascertain its protection
tenure. Meanwhile, in terms of acceptance, based on a recent survey by ABC News/Ipsos, more
than 80% of Americans are willing to receive vaccines. However, this is divided between 40% of
whom are open to immediate take-up, versus 44% whom intend to wait.
Near Term Oil Demand Remains Weak. In the meanwhile, global oil demand is expected to
remain weak in the near term. OPEC anticipates that global C-19 infections will continue to rise
towards end-20 following the latest resurgence of cases. Hence, this will prolong ongoing
lockdowns in large parts of Eurozone and the US. In turn, this will lead to a spill-over effect in
1H21. Therefore, supply-demand (Figure 3) fundamentals for crude would remain fragile in the
near-to-medium term. As such, it is still early days to predict the exact timing whereby the
pandemic will be fully resolved and economic recovery kicks-in. Evidently, IEA believes that it will
take several months before a critical mass of vaccinations is achieved to impact oil demand. In the
meantime, the upcoming year-end holiday season may result in another surge in infections - and
hence more confinement measures. On the bright side, OPEC expects C-19 cases to ease in 2H21,
following wide availability of vaccines. Furthermore, advancements in C-19 treatment will support
consumer confidence - and hence economic recovery and rise in oil demand. However, OPEC
expects economic growth (Figure 4) to be asymmetrical - leaning towards non-contact intensive
sectors (e.g. healthcare, IT and communications). Meanwhile, activity in the travel and tourism
sectors will unlikely revert to pre-Covid levels before 2023. This is due to the lingering effects of
C-19 on consumer sentiment. As such, this will limit demand growth for aviation fuels.
Page 2 of 24
21-Dec-20
Figure 3: Global Crude Oil Supply-Demand Figure 4: Global Economic Growth
101 2.5
10
Excess Supply/ (Shortfall) mn bpd

100 2.0 8
99 1.5 6
98
1.0
GDP Growth (%)

4
mn bpd
97
0.5 2
96
0.0 0
95
94 -0.5 -2
93 -1.0 -4
92 -1.5 -6
2015 2016 2017 2018 2019 2020 2021
-8
Demand Production Excess/ (Shortfall) 2018 2019 2020 2021
Source: EIA, TA Securities Source: IMF, TA Securities
Oil Companies Unwilling to Spend Whilst Waiting. Given the uncertain timing of oil price
recovery, we believe that oil companies shall remain in austerity mode, and hold back on capex (Figure
5) and opex spend. This is pending a sustainable recovery in crude demand to alleviate the current
oversupply situation. We believe that oil companies are only willing to invest if there are signs of a
lasting multi-year rally in oil price. Evidently, selected global oil companies are expected to cut capex
by 11% YoY in 2020. In the case of Exxon Mobil, it targets to further slash 2021 capex to USD16bn-
19bn (estimate: -24% YoY). Whereas for Chevron-Noble, it will confine combined spending to USD14bn
in 2021. The merged entities have scaled back their long-term capex plans by up to USD8bn p.a versus
previous guidance. This will reduce its 2022-25 capex plans to USD14bn-16bn p.a. (previous guidance:
USD19bn-22bn p.a.) Whereas in the case of Saudi Aramco, there are plans to cut capex to USD25bn
or less in 2021. This is approximately half the amount that was originally planned (USD40bn-45bn).
Lastly, Petrobras’ updated 5-year business plan for 2021-25 aims for reduced investments of
USD55.2bn. This implies a significant reduction versus its prior 2020-24 plan to spend USD75.7bn.
Figure 5: Capex Spend by Major Oil Companies
40,000
35,000
Capex (RM mn)
30,000
25,000
20,000
15,000
10,000
5,000
-
2020E Previous Guide 2019
Source: Companies, TA Securities
Page 3 of 24
21-Dec-20
Petronas Grapples with Chunky Commitments. In particular, we believe that Petronas will
likely hold back on capex spend (Figure 6) in 2021, due to hefty dividend (Figure 7) commitment
and unexpected sales tax payments. To recap, Petronas will pay higher dividend of RM34bn
(previous guidance: RM24bn, 2019: RM54bn) to the Federal government in 2020. This is in spite of
9M20 core net losses of RM11bn, and coupled with 2019 special dividend of RM30bn.
Furthermore, according to media reports, Petronas is expected to pay the state of Sabah sales tax
(rate: 5%) of RM1.25bn in 2021. This is after a settlement with the state of Sarawak to pay RM3bn
of sales tax back in Aug-20. On the bright side, Petronas’ balance sheet remains strong (net cash
position, cash: RM141bn). Additionally, Petronas has been able to partially fund its financial
commitments via asset sales and bond issuances. The latter includes: (1) bond offering in April
(USD6bn), and (2) upcoming stake sales in: (i) MISC Bhd (6% stake, RM1.8bn), and (ii) KLCCP
Stapled Group (7.8% stake, RM997mn).
Figure 6: Petronas Capex Spend Figure 7: Petronas Dividends
80.0 60
71.0
70.0 64.7 50
Petronas Capex (RM bn)
60.0 56.6
Dividends (RM bn)

50.4 40
45.6 46.8 47.8
50.0 44.5
40
40.0 30
30.0 20
20.0
10
10.0
0.0 0
2012 2013 2014 2015 2016 2017 2018 2019 2020E
Source: Petronas, TA Research Source: Petronas, TA Research
Contractors Reliant on Petronas Will Struggle. Given Petronas’ heavy financial burden in
2020, we do not discount the likelihood of sustained expenditure cuts in 2021 (YTD20: -18%). This
is following the Group’s plans to cut 2020 capex spend (-21% versus previous guidance) to an
estimated RM40bn (-16% YoY). This is on top of planned 2020 opex cuts of 12% versus original
pre-Covid budget. To recap, Petronas has set its budget based on subdued oil price of USD40/bbl
in 2020 and USD42/bbl in 2021. Therefore, this implies limited contracts and lower margins for
O&G upstream contractors that rely on Petronas. O&G companies under our coverage with large
exposure to Petronas offshore contracts include MMHE, Uzma, Pantech, and Velesto Energy.
Therefore, we expect sustained near-term earnings weakness for these companies due to slow
orderbook replenishment and weak daily charter rates (DCR).
Fundamentals May Catch Up Sooner-than-Expected. Whilst near-term supply-demand

fundamentals remain weak, oil price downside will be cushioned by bullish sentiment. Evidently,
sentiment has a significant weightage on oil price, and trades ahead of fundamentals. Expectations of
demand recovery, coupled with recent normalization of inventories, provides a major boost to oil
price sentiment. Therefore, this may potentially lead to speculative long positions on the crude
futures market and also pre-emptive inventory (Figure 8) stockpiling. Moreover, traction in vaccine
deployment is unrelenting, and appears to accelerate at a faster than expected pace. As such,
fundamental oil price recovery could materialize sooner-than-expected. For instance, in just a
month’s time after Pfizer’s first announcement on vaccine efficacy, a UK senior citizen received the first
injection. A week later, 2.9mn doses have reached 636 locations in the US. Furthermore, upcoming
promising vaccines by global research institutions (outside of China and Russia) at advanced Phase 3
trials include: (1) Novavax, (2) Johnson & Johnson, and (3) Astra-Zeneca.
Page 4 of 24
21-Dec-20
Expect Oil Demand Recovery in 2H21. Based on EIA forecasts, 2020 crude oil demand will
average 92.4mn bpd. This implies YoY contraction of 8.8mn bpd. Meanwhile, OPEC expects a
steeper YoY decline of 9.8mn bpd in 2020, leading to total demand of 90mn bpd. Nevertheless,
both EIA and OPEC anticipate demand expansion of 5.8-5.9 mn bpd in 2021. For OPEC, higher
demand is underpinned by expectations of 4.4% (2020: -4.2%) global economic growth that will
propel demand for transportation and industrial fuels. The latter is on the back of higher
infrastructure spending, as well as improving construction and industrial activities. The growth in
oil demand (Figure 9) will primarily be driven by OECD Americas, China and India. Against this
backdrop, OPEC expects total oil demand to spike up to 95.9mn bpd in 2021 (EIA: 98.2mn bpd).
Figure 8: OECD Inventories Figure 9: Change in Global Oil Demand
3250 value 3-year MA 3000

3200 8.0
2980
Change in Oil Demand (mn bpd)

3150 6.0
OECD Stocks (mn bbl)
2960
3100 4.0
3050 2940 2.0
3000 2920 0.0
2950 -2.0 2019 2020 2021
2900
2900 -4.0
2880
2850 -6.0
2800 2860
-8.0
2750 2840 -10.0
Jan-18
Apr-18
Jul-18
Oct-18
Jan-19
Apr-19
Jul-19
Oct-19
Jan-20
Apr-20
Jul-20
Oct-20
Jan-21
Apr-21
Jul-21
Oct-21
China US Japan India Others
Source: EIA, TA Research Source: EIA, TA Research
Expect 2021 Supply to Lag Demand Growth. On the supply side, following contraction of 6.4mn
bpd in 2020, EIA expects 2021 global oil supply (Figure 10) to jump by 3.2mn bpd to 97.4mn bpd (2020:
94.2mn bpd). This is largely driven by increased production from OPEC (+1.9mn bpd) and Canada (+500k
bpd). EIA projects that OPEC production (Figure 11) will average 27.5mn bpd in 2021, which implies a
YoY increase of 1.9mn bpd. The expansion reflects OPEC’s recently announced production ramp-up
(potentially up to 2mn bpd), as well as Libya’s output surge. To recap, Libya’s production skyrocketed
from 130k bpd in September to 1.1mn bpd currently. This is following upliftment of military blockades
on oil facilities after a ceasefire between the Libyan National Army and Libya’s interim government. The
expansions above will more than offset lower US production of 11.1mn bpd (-200k bpd) in 2021. The
latter is underpinned by declining production rates at existing wells. After taking to account supply-
demand forecasts, EIA expects a global supply deficit of 700k bpd in 2021 (2020: 1.8mn surplus).
Figure 10: Change in Global Oil Supply Figure 11: OPEC Production
OPEC US Russia Brazil Canada 34

Others Mexico China Total
32
OPEC Production (mn bpd)
4.0 3.5
Change in World Production (mn bpd)
30
2.0 1.5
Change in Supply (mn bpd)
28
0.0 -0.5
2019 2020 2021 26
-2.0 -2.5
24
-4.0 -4.5
22
-6.0 -6.5 20
Apr-17
Apr-18
Apr-19
Apr-20
Apr-21
Jan-17
Jul-17
Oct-17
Jan-18
Jul-18
Oct-18
Jan-19
Jul-19
Oct-19
Jan-20
Jul-20
Oct-20
Jan-21
Jul-21
Oct-21
-8.0 -8.5
Source: EIA, TA Research Source: OPEC, TA Research
Page 5 of 24
21-Dec-20
Post-Covid Demand Will Propel Capex Spend. O&G production hikes imply resumption of
capex and opex spend for:- (1) new and expansion O&G projects, (2) well drilling (Figure 12)
activity, (3) production enhancement, (4) platform and facilities maintenance etc. When the latter
plays out, demand will surge for offshore fleet and services from both upstream and downstream
providers. Therefore, this would propel a rebound in DCRs, fleet utilization and new contract
awards. Moreover, O&G production ramp-up translates to higher requirements for crude
transportation. Hence, this will escalate demand for LNG and petroleum tanker fleets. As a result,
the tide will turn for O&G contractors and shipping players on the back of orderbook and margin
recovery. Moreover, during the Covid pandemic, O&G companies had recognized asset
impairments and introduced cost cutting measures. As such, the leaner cost base enables revenue
expansion to largely flow directly to bottomline.
Biden Victory May Ease US-China Trade War. We believe there is possibility of a ceasefire
or cool-down of the US-China trade war. This is following the upcoming inauguration of Joe Biden
as US president to replace incumbent Donald Trump. Recall that the Trump administration imposed
tariffs on USD370bn worth of Chinese imports (start: mid-18). This includes several industrial
chemicals such as olefins, aromatics, alcohols, acetyls, acrylics, anhydrides, glycols, etc. In
retaliation, Beijing imposed tariffs on close to USD200bn of US imports. Affected chemicals include
most grades of linear low-density polyethylene (LLDPE), all high-density PE (HDPE),
polypropylene (PP), aromatics, methanol, etc. However, in Jan-20, both sides reached a truce and
signed the Phase 1 trade deal. The latter resulted in a freeze of US tariff hikes in exchange for
China’s commitment to purchase an additional USD200bn of US imports by 2021. In our view,
Biden’s office will unlikely implement new tariffs on China that will disrupt petrochemical trade
flows. Recall that Biden had earlier criticized Trump’s application of tariffs as
“reckless”. Furthermore, Biden had slammed the trade war with China — saying tariffs have hurt
American businesses and consumers. Evidently, the surge in Global PMI (Purchasing Managers
Index) indices (Figure 13), particularly US PMI, reflects robust outlook for petrochemical producers.
Figure 12: Rig Utilization Rate in South East Asia Figure 13: Global Purchasing Managers Index (PMI)
100 Jackup Tender Semi-sub 65

90
60
80
70 55
Rig Utilization %
60
50
50
40 45
30
40
20
10 35
0
Nov-17 May-18 Nov-18 May-19 Nov-19 May-20 Nov-20
China Manufacturing PMI US Manufacturing PMI

JPM Global Manufacturing PMI
Source: Bloomberg, TA Research Source: Bloomberg, TA Research
Maintain Overweight. Against the promising backdrop above, we maintain our Overweight
recommendation on the sector. We also maintain our oil price assumptions of: (1) USD45/bbl in
2020 (Current: USD52/bbl, YTD: USD43/bbl, EIA Forecast: USD41/bbl, Bloomberg Consensus Median:
USD43/bbl), and (2) USD50/bbl in 2021 (EIA Forecast: USD48/bbl, Bloomberg Consensus Median:
USD48/bbl). EIA’s 2021 forecast of USD49/bbl reflects expectations that rising oil demand and
restrained OPEC+ oil production will result in normalization of bloated inventories. Additionally,
we expect a weak US dollar to provide a boost to oil price. In particular, we are sanguine on the
prospects of petrochemical producers and shipping players. However, we are cautious on
upstream contractors with near-term earnings risks due to heavy reliance on Petronas contracts.
Page 6 of 24
21-Dec-20
Figure 19: Peers’ Comparison Table
Tgt.Price Price Mkt Cap PE (x) PBV (x) ROE (%) ROA (%) DPS (sen) Dividend Yield (%)
Call
(RM) (RM) (RM mn) CY21 CY22 CY21 CY22 CY21 CY22 CY21 CY22 CY21 CY22 CY21 CY22
Lotte Titan Buy 3.58 2.92 6,637.1 27.3 23.5 0.5 0.3 2.0 2.3 1.7 2.0 1.0 1.0 0.3 0.3
MISC Buy 8.90 6.43 28,702.2 13.1 12.4 0.8 1.0 6.0 6.2 4.1 4.3 30.0 30.0 4.7 4.7
MMHE Hold 0.50 0.46 728.0 79.7 19.0 0.3 0.2 0.4 1.7 0.3 1.1 0.0 0.0 0.0 0.0
Pantech Sell 0.29 0.41 303.3 10.9 9.0 2.7 2.6 4.0 4.7 2.9 3.4 1.1 1.4 2.8 3.3
Pet Chem Buy 9.10 7.58 60,640.0 24.3 19.9 1.9 1.9 8.0 9.3 6.6 7.8 18.0 20.0 2.4 2.6
Serba Buy 2.10 1.73 5,827.2 8.5 8.1 1.7 1.5 20.3 18.6 7.8 7.5 5.0 6.0 2.9 3.5
Uzma Sell 0.61 0.60 192.0 8.9 6.5 0.4 0.4 6.3 5.9 1.7 2.2 0.0 0.0 0.0 0.0
Velesto Hold 0.16 0.15 1,191.3 (67.2) 81.8 0.4 (0.3) (0.6) 0.5 (0.5) 0.4 0.0 0.0 0.0 0.0
Average* 15.5 14.0 1.1 1.1 6.7 6.2 3.6 3.6 11.0 11.7 2.6 2.9
Appendix 1: OPEC+ Conference Outcome

Date
Conference Outcome Duration Notes
Announced
Dec-16 Production Cut of 1.8mn bpd - OPEC 6+6 Months (Start: Jan-17) Oct-18 Production used as base line. Production limit of 32.5mn bpd.
(1.2mn bpd), NOPEC (600k bpd)
May-17 Extension of Dec-16 Annouced Cuts 9+3 months extension until Exemptions: Libya & Nigeria
Mar-18/Jun-18 (Start: Jun-17)
Dec-17 Extension of Dec-16 Annouced Cuts 12 months until Dec-18 Libya & Nigeria agreed to join cuts.
Jun-18 Production increase of 1mn bpd 6 months (Jul-18- Dec 18) Revert to 100% compliance (limit: 32.5mn bpd) vs. Actual overcompliance (May-18: 147%)
Dec-18 Production cut of 1.2mn bpd - OPEC (800k 6 months (Jan-19 to Jun-19) Cuts from Oct-18 base line; Exemptions: Iran, Venezuela & Libya
bpd), NOPEC (400k bpd)
Jul-19 Extension of Dec-18 Annouced Cuts 9 months (Jul-19 to Mar-20) -
Dec-19 Additional production cuts of 500k bpd on 6 months (Start: Jan-20) Cuts from Oct-18 base line, Additional voluntary cut by Saudi Arabia (400k bpd)
top of Dec-18 annouced cuts (1.2mn bpd).
Mar-20 No consensus on future production policy. n.a. Extraordinary meeting to address Covid-19 impact.
Apr-20 Production cuts: (1) May-June 2020: 9.7mn bpd (2 months), (2) Jul-Dec Oct-18 Production used as base line - except for Saudi & Russia (11mn bpd). In May-20,
2020: 7.7mn bpd (6 months), and (3) Jan-21 to Apr-22: 5.7mn bpd (16 additional voluntary adjustments from Saudi Arabia (1 mn bpd), UAE (100k bpd), Kuwait
months) (80k bpd), and Oman (10k-15k bpd).
Jun-20 Sustained May-Jun 2020 production cuts of 1 month (Jul-20) Cuts from Oct-18 base line. Mexico did not participate for this round. Extra reductions on
9.6mn bpd to Jul-20 non-compliant countries in July-Sept to compensate for May-June shortfalls.
Jul-20 Moderate production cuts to 7.7mn bpd in 5 months Cuts from Oct-18 base line. Members that failed to comply with June production limits will
Aug-Dec 2020 compensate for shortfalls in Aug-Sept.
Dec-20 Lower production cuts to 5.7mn bpd 1 month (Jan-21) Compensation from non-complying countries extended to Jan-Mar 2021
gradually. From Jan-21, lower production
cuts to 7.2mn bpd. Future monthly
adjustments will not exceed 500k bpd
Source: OPEC, TA Research
Page 7 of 24
21-Dec-20
Lotte Chemicals Titan Holding Bhd TP: RM3.58 (+22.6%)

Last Traded: RM2.92
ASP Strength to Drive Earnings BUY
Investment Themes Share Information

Expect Sustained Strength for Polymer Prices. Lotte Chemicals Titan Bloomberg Code TTNP MK
Holding (TTNP) currently benefits from high polymer average selling prices Stock Code 5284
(ASP). This on the back of strong demand for plastics, packaging materials, Listing Main Market
Personal Protective Equipment (PPE) and hygiene products. This emanates Share Cap (mn) 2,273
from sustained Covid-19 (C-19) infections and lockdowns worldwide. Market Cap (RMmn) 6,637
Furthermore, we anticipate upcoming C-19 vaccination programs will
52-wk Hi/Lo (RM) 2.98/0.98
continue to drive high usage of PPE. Thus, we expect sustained robust demand
12-mth Avg Daily Vol ('000 shrs) 8,194.8
for medical PPE and single use plastics (for usage in e-commerce and food
Estimated Free Float (%) 12.2
deliveries). To recap, polymers (i.e. polyethelene (PE) and polypropylene (PP))
contributes the bulk of TTNP’s earnings (83% of 9M20 EBITDA). Beta 1.5
Major Shareholders (%) Lotte Group - 76%
US MEG Operations May Finally Turnaround. Since hitting a trough of EPF- 4.1%
USD452/mt in May-20, US prices of Mono Ethylene Glycols (MEG) have been
Forecast Revision (%)
inching up progressively to current levels of USD562/mt. This was partly
FY20 FY21
attributed to production shutdowns caused by Hurricanes Laura and Delta in
Forecast Revision (%) 0 0
3Q20. US MEG plants, including TTNP’s 40%-associate LC USA, have since
resumed operations in mid-to-late Oct-20. However, we expect the market Core Net Profit (RM mn) 76.9 243.2
to remain tight through 4Q20 due to inventory replenishment. As such, LC Consensus 126.0 232.5
USA may finally turnaround after three consecutive quarters of losses. TA/Consensus (%) 61 105
Previous Rating Sell (Maintained)
No Further Product Dumping by US Producers. We believe there is
high probability of the US-China trade war simmering down. This is given the
Financial Indicators
upcoming inauguration of Joe Biden as US president to replace incumbent
Donald Trump. To recap, in mid-18, Trump imposed tariffs on USD370bn FY20 FY21
worth of Chinese imports, including industrial chemicals. In return, Beijing Net Debt/Equity (x) Net Cash Net Cash
imposed retaliatory tariffs on circa USD200bn of US imports. This includes ROA (%) 0.5 1.7
most grades of linear low-density PE, all high-density PE, as well as PP. As a ROE (%) 0.6 2.0
result, US producers diverted shipments of polyolefins into South East Asian NTA/Share (RM) 5.3 5.4
markets. Thus, this resulted in oversupply and hence ASP weakness in 4Q19- P/NTA (x) 0.5 0.5
1H20. Evidently, TTNP suffered from pretax losses in 4Q19-1Q20, due to
compressed polymer spreads. Nevertheless, moving forward we expect the Share Performance
worst to be over, given that Biden will unlikely impose further tariffs on Price Change (%) TTNP FBMKLCI
petrochemical imports from China.
1 mth 21.7 3.0
Risks 3 mth 59.6 9.7
Onslaught of new Capacity from RAPID. TTNP is expected to face stiff 6 mth 63.1 9.8
competition from Petronas Chemical’s upcoming RAPID complex at 12 mth 23.7 3.3
Pengerang (launch: 1Q21). Output from RAPID that competes directly with
TTNP include: (1) low-density PE (350k tpa), (2) PP (900k tpa), (3) Propylene
(12-Mth) Share Price relative to the FBMKLCI
(469k tpa), (4) Benzene (165k tpa), and (5) Butadiene (179k tpa).
Recommendation
We have a Buy call on TTNP with target price (TP) of RM3.58 based on 7x
CY21 EV/EBITDA.
Source: Bloomberg
Page 8 of 24
21-Dec-20
Earnings Summary
Income Statement Balance Sheet
FYE 31 Dec (RMmn) 2018 2019 2020E 2021F 2022F FYE 31 Dec (RMmn) 2018 2019 2020E 2021F 2022F
Revenue 9,244.7 8,438.0 6,690.1 7,119.4 7,621.4 PPE 5,360.3 4,909.6 4,796.4 4,639.2 4,524.1
EBITDA 1,116.0 763.6 699.6 945.4 849.4 Associates & JCEs 2,101.3 2,232.7 2,123.8 2,016.8 2,021.4
Depreciation (499.1) (631.2) (563.2) (629.7) (611.2) Others 82.3 575.2 575.2 575.2 575.2
Net finance cost 84.8 85.2 64.7 79.3 92.0 Non-Current Assets 7,543.9 7,717.5 7,495.4 7,231.2 7,120.7
Share of Associates 3.6 158.3 (108.9) (107.0) 4.6
Exceptionals 58.8 127.5 (3.0) 0.0 0.0 Inventories 1,507.7 1,324.9 1,404.2 1,203.2 1,203.2
Pretax Profit 764.0 503.3 89.4 287.9 334.7 Trade and other Rcvb 1,006.7 857.4 983.5 990.9 990.9
Taxation (64.2) (60.8) (13.4) (43.2) (50.2) Cash and Deposits 2,245.0 999.8 1,397.1 1,839.3 2,206.1
MI (2.0) (2.8) (2.0) (1.6) (1.8) Others 1,216.7 2,959.2 2,959.2 2,959.2 2,959.2
Net Profit 697.9 439.7 73.9 243.2 282.7 Current Assets 5,976.1 6,141.2 6,744.1 6,992.7 7,359.4
Core Net Profit 639.1 312.2 76.9 243.2 282.7 Total Assets 13,520.0 13,858.6 14,239.5 14,223.8 14,480.1
Per Share Data Borrowings 0.0 0.0 180.0 0.0 0.0

Core EPS (sen) 28.1 13.7 3.4 10.7 12.4 Deferred Tax 397.3 416.0 416.0 416.0 416.0
DPS (sen) 17.0 17.0 0.0 1.0 1.0 Others 281.0 392.6 392.6 392.6 392.6
Book Value (RM) 5.3 5.3 5.3 5.4 5.5 Non-current Liabilities 678.2 808.6 988.6 808.6 808.6
Net Tang Asset (RM) 5.3 5.3 5.3 5.4 5.5
Borrowings 0.0 0.0 20.0 0.0 0.0
Ratios Trade & other Payables 834.0 752.5 861.8 825.7 825.7
FYE 31 Dec 2018 2019 2020E 2021F 2022F Others 0.9 18.3 18.3 18.3 18.3
Valuations Current Liabilities 834.9 770.8 900.1 844.0 844.0
Core PER (x) 10.3 21.0 85.4 27.0 23.2
Dividend yield (%) 5.9 5.9 0.0 0.3 0.3 Total Liabilities 1,513.2 1,579.4 1,888.7 1,652.6 1,652.6
EV/EBITDA (x) 3.9 7.7 8.1 5.3 5.5
P/BV (x) 0.5 0.5 0.5 0.5 0.5 Share capital 5,816.8 5,816.8 5,816.8 5,816.8 5,816.8
P/NTA (x) 0.5 0.5 0.5 0.5 0.5 Reserves & Treasury 1,045.4 967.2 967.2 967.2 967.2
FCFE Yield (%) 0.2 7.5 6.2 7.1 6.0 Retained Earnings 5,121.7 5,171.9 5,241.4 5,460.2 5,714.7
Minority Interests 23.0 323.4 325.4 326.9 328.8
Profitability ratios Equity 12,006.8 12,279.2 12,350.8 12,571.2 12,827.4
EBITDA margin (%) 12.1 9.1 10.5 13.3 11.1
EBIT margin (%) 6.7 1.6 2.0 4.4 3.1 Total Equity + Liabilities 13,520.0 13,858.6 14,239.5 14,223.8 14,480.1
PBT margin (%) 8.3 6.0 1.3 4.0 4.4
Core Net margin (%) 6.9 3.7 1.1 3.4 3.7 FYE 31 Dec (RMmn) 2018 2019 2020E 2021F 2022F
ROE (%) 5.3 2.6 0.6 2.0 2.3 Cash Flow Statement
ROA (%) 4.7 2.3 0.5 1.7 2.0 Pretax profit 764.0 503.3 89.4 287.9 334.7
Depreciation 499.1 631.2 563.2 629.7 611.2
Liquidity ratios Net Interest (84.8) (85.2) (64.7) (79.3) (92.0)
Current ratio (x) 7.2 8.0 7.5 8.3 8.7 Associates & JCEs (3.6) (158.3) 108.9 107.0 (4.6)
Quick ratio (x) 6.2 7.0 6.5 7.3 7.7 Working Cap Changes (459.0) 250.6 (96.2) 157.5 0.0
Interest coverage (x) 40.4 7.8 8.9 70.1 #DIV/0! Income Tax Paid (64.2) (60.8) (13.4) (43.2) (50.2)
Others 221.9 5.2 3.0 0.0 0.0
Leverage ratios CF from Operations 873.5 1,086.2 590.0 1,059.7 799.2
Total Debt/Equity (x) 0.00 0.00 0.02 0.00 0.00
Total Debt/ Assets (x) 0.00 0.00 0.01 0.00 0.00 Capex (662.1) (543.2) (450.0) (472.5) (496.1)
Net Gearing (x) Net Cash Net Cash Net Cash Net Cash Net Cash Interest Income 100.1 102.1 80.0 83.8 92.0
Others (333.8) (1,110.9) 0.0 0.0 0.0
Growth ratios CF from Investing (895.8) (1,552.0) (370.0) (388.7) (404.2)
Revenue (%) 18.2 (8.7) (20.7) 6.4 7.1
EBITDA (%) (30.0) (31.6) (8.4) 35.1 (10.2) Dividends (343.0) (386.3) (7.4) (24.3) (28.3)
PBT (%) (33.0) (34.1) (82.2) 222.2 16.3 Net Change in debt 0.0 0.0 200.0 (200.0) 0.0
Core Net Profit (%) (41.6) (51.1) (75.4) 216.2 16.3 Interest Paid (15.3) (16.9) (15.3) (4.5) 0.0
Core EPS (%) (42.4) (51.1) (75.4) 216.2 16.3 Others (164.6) 58.2 0.0 0.0 0.0
CF from Financing (522.8) (345.0) 177.4 (228.8) (28.3)
Key Assumptions
Plant Utilization (%) 83 90 85 90 92 Net Cash Flow (545.1) (810.8) 397.3 442.2 366.7
PE-Naphtha (USD/mt) 175 457 448 457 Beginning Cash 2,374.2 1,855.9 999.8 1,397.1 1,839.3
PP-Naphtha (USD/mt) 255 525 519 532 Exchange Rates 26.8 (45.1) - - -
Ending Cash 1,855.9 999.9 1,397.1 1,839.3 2,206.1
Page 9 of 24
21-Dec-20
MISC Bhd TP: RM8.90 (+38.4%)

Last Traded: RM6.43
OPEC+ Ramp Up in Production Benefits Tanker Fleet BUY

Bloomberg Code MISC MK
1. New Assets and Fleet Expansion will Anchor Growth. Management is
Stock Code 3816
confident of achieving healthy earnings growth in the next 3-4 years. This is
Listing Main Market
underpinned by circa USD3bn of new investment capex secured YTD20. This
Share Cap (mn) 4,464
includes, amongst others:- (1) provision of Mero-3 Floating Production
Market Cap (RMmn) 28,702
Storage Offloading (FPSO) vessel (estimated capex: up to USD2bn), and (2)
delivery of six newbuild Very Large Ethane Carriers (VLEC) in 4Q20. Par Value 1.00
Moreover, profits will be boosted by: (1) 1Q20 kitchen sinking following 52-wk Hi/Lo (RM) 8.61/6.38
negative outcome of Gumusut Kakap arbitration, (2) major fleet expansion 12-mth Avg Daily Vol ('000 shrs) 3,651.0
with deliveries of eleven DP2 Shuttles (1H20-2H22), and four LNG carriers Estimated Free Float (%) 21.1
(1H21-1H23). The major asset and fleet expansion above will anchor MISC’s Beta 0.5
multi-year earnings expansion. Major Shareholders (%) Petronas - 51.0
EPF - 9.6
2. OPEC+ Production Ramp-Up Raises Demand for Transportation
Amanah Saham - 4.2
Fleet. Recent traction in vaccine developments spring hopes of looming
Forecast Revision
economic recovery. This is via restoration of air, sea and land travel that will
FY20 FY21
boost demand for transportation fuels and lead to improved refining margins.
Forecast Revision (%) 0.0 0.0
In turn, this is expected to propel demand for crude oil and natural gas.
Net profit (RMm) 2,235.9 2,198.1
Eventual demand recovery alludes to reversal of OPEC+ supply cuts and
Consensus 2,012 2,088
subsequent ramp up in global production. Even at this early juncture, OPEC+
has started to scale back on production cuts. To recap, OPEC+ recently TA's / Consensus (%) 111.1 105.3
announced gradual moderation of supply cuts (baseline production: Oct-18) by Previous Rating Buy (Maintained)
2mn bpd to 5.7mn bpd in Jan-21 (Dec: 7.7mn bpd cuts). Therefore, in Jan-21,
outputs cut will adjust to 7.2mn bpd (MoM: +500k bpd). This will be followed Financial Indicators
by future monthly production adjustments not exceeding 500k bpd. FY20 FY21
Correspondingly, this translates to higher requirements for crude and LNG Net Debt/Equity (%) 0.1 0.1
transportation. On the back of this, MISC’s tanker and LNG carrier fleet will FCFPS (sen) 25.3 25.7
benefit from higher Daily Charter Rates (DCR) and utilization. P/CFPS (x) 25.4 25.1
ROE (%) 6.4 6.1
3. Still Keen on New FPSO Projects. Fresh from the win of Mero-3,
ROA (%) 4.3 4.2
management is still eyeing new FPSO projects, albeit at a smaller and more
NTA/Share (RM) 7.8 8.0
manageable scale. According to management, MISC’s Offshore segment will
Price/NTA (x) 0.8 0.8
continue to source for attractive opportunities in targeted markets. Based on
reports by Upstream, MISC is in the running for 2 FPSOs in Malaysia. Industry
Share Performance (%)
sources allude that MISC is among the contenders that will bid for Petronas’s
Price Change MISC FBM KLCI
retender of the Limbayong FPSO, which is up for bidding in early Jan-21.
1 mth (6.8) 3.0
Additionally, MISC is also believed to have submitted a recent bid for the
3 mth (14.8) 9.7
feasibility study of Conoco Phillips’s Patawali development.
6 mth (17.6) 9.8
12 mth (23.0) 3.3
Risks
Slower-than-Expected Recovery in Tanker Rates. Tanker day rates may (12-Mth) Share Price relative to the FBMKLCI
continue to be weak through 4Q20 until 1H21. This in on the back of subdued
demand caused by intense Covid-19 infections and lockdowns in the near
term. Since its recent peak in Jun-20 at USD52K per day, Aframax spot rates
have been on a downward spiral to reach current levels of USD5K per day.
These rock-bottom rates are most likely below opex breakeven levels.
Coupled with weak US lightering demand, this had led to pretax losses for the
petroleum fleet in 3Q20.
Recommendation
Source: Bloomberg
We have a Buy recommendation on MISC with target price of RM8.90 based
on 18x CY21 P/E.
Page 10 of 24
21-Dec-20
Earnings Summary
Revenue 8,780.3 8,962.7 9,135.1 9,088.8 9,968.7 PPE 23,335.9 23,287.2 22,702.1 22,183.5 21,717.1
EBITDA 3,318.9 4,193.0 4,408.1 4,487.4 4,549.7 Intangibles 856.9 840.7 826.9 813.1 799.3
Depreciation & Amortisation (1,904.2) (2,229.3) (2,098.9) (2,032.4) (1,980.2) Associate & JV 955.6 926.2 1,171.8 1,418.6 1,666.7
Net Financing Cost (394.6) (484.3) (394.6) (385.6) (376.6) Others 17,903.2 16,483.4 16,729.0 16,975.8 17,223.9
Associate & JV 283.3 250.6 245.6 246.8 248.1 Non-current Assets 42,096.0 40,611.3 40,258.0 39,972.4 39,740.3
EI 40.7 (217.7) (2,248.7) 0.0 0.0
PBT 1,344.1 1,512.3 (88.3) 2,316.2 2,441.0 Inventories 250.0 165.7 182.3 200.5 220.5
Tax (59.8) (76.1) (64.8) (104.2) (109.8) Trade & Other Receivable 3,803.1 3,828.9 4,211.8 4,633.0 5,096.3
MI 27.2 (9.9) 140.4 (13.9) (14.6) Others 160.7 227.1 227.1 227.1 227.1
PAT 1,311.5 1,426.3 (12.7) 2,198.1 2,316.5 Cash & Bank Balances 5,755.6 7,030.8 7,651.9 8,303.0 8,999.0
Core Net Profit 1,270.8 1,644.0 2,235.9 2,198.1 2,316.5 Current Assets 9,969.4 11,252.5 12,273.1 13,363.5 14,542.9
Per Share Data Total Assets 52,065.4 51,863.8 52,531.1 53,336.0 54,283.2
Core EPS (sen) 28.5 36.8 50.1 49.2 51.9
DPS (sen) 30.0 33.0 30.0 30.0 30.0 Borrowings 7,271.4 7,552.7 7,312.7 7,072.7 6,832.7
Book Value (RM) 7.9 7.8 8.0 8.2 8.4 Other 650.6 755.5 755.5 755.5 755.5
NTA (RM) 7.7 7.6 7.8 8.0 8.2 Non-current Liabilities 7,922.0 8,308.2 8,068.2 7,828.2 7,588.2
Ratios Borrowings 5,778.5 5,599.5 5,539.5 5,479.5 5,419.5

FYE 31 Dec 2018 2019 2020E 2021F 2022F Trade & Other Payables 1,890.2 2,109.3 2,320.2 2,552.3 2,807.5
Valuations Others 110.5 93.0 93.0 93.0 93.0
Core PER (x) 22.6 17.5 12.8 13.1 12.4 Current Liabilites 7,779.2 7,801.8 7,952.7 8,124.8 8,320.0
Dividend yield (%) 4.7 5.1 4.7 4.7 4.7
EV/EBITDA (x) 19.5 15.1 9.4 13.7 13.3 Total Liabilities 15,701.2 16,110.0 16,020.9 15,953.0 15,908.2
P/BV (x) 0.8 0.8 0.8 0.8 0.8
P/NTA (x) 0.8 0.8 0.8 0.8 0.8 Share Capital 8,923.3 8,923.3 8,923.3 8,923.3 8,923.3
FCFE Yield (%) 0.8 0.8 3.9 4.0 4.1 Others 6,583.8 6,059.9 6,059.9 6,059.9 6,059.9
Retained Earnings 19,844.1 19,744.0 20,640.8 21,499.7 22,477.1
Profitability ratios MI 1,013.0 1,026.6 886.2 900.1 914.7
EBITDA margin (%) 37.8 46.8 48.3 49.4 45.6 Total Equity 36,364.2 35,753.8 36,510.2 37,383.0 38,375.0
EBIT margin (%) 16.1 21.9 49.9 27.0 25.8
PBT margin (%) 14.8 19.3 23.6 25.5 24.5 Total Equity + Liabilities 52,065.4 51,863.8 52,531.1 53,336.0 54,283.2
Core Net margin (%) 14.5 18.3 24.5 24.2 23.2
ROA (%) 2.5 3.2 4.3 4.2 4.3 FYE 31 Dec (RMmn) 2018 2019 2020E 2021F 2022F
PBT 1,344.1 1,512.3 (88.3) 2,316.2 2,441.0
Liquidity ratios Depreciation 1,904.2 2,229.3 2,098.9 2,032.4 1,980.2
Current Ratio (x) 1.3 1.4 1.5 1.6 1.7 Associates & JCEs (283.3) (250.6) (245.6) (246.8) (248.1)
Quick Ratio (x) 1.2 1.4 1.5 1.6 1.7 Taxation (59.8) (76.1) (64.8) (104.2) (109.8)
Changes in WC (56.6) 277.6 (188.5) (207.4) (228.1)
Leverage ratios Others 1,249.0 405.1 2,248.7 0.0 0.0
Total Debt/ Assets (x) 0.3 0.3 0.2 0.2 0.2 CFO 4,097.6 4,097.6 3,760.2 3,790.2 3,835.2
Net Gearing (x) 0.2 0.2 0.1 0.1 0.1 Capex (2,292.2) (2,292.2) (1,500.0) (1,500.0) (1,500.0)
Interest coverage (x) 3.6 4.1 11.6 6.4 6.8 Other (1,344.7) (1,344.7) 0.0 0.0 0.0
CFI (3,636.9) (3,636.9) (1,500.0) (1,500.0) (1,500.0)
Growth ratios
Revenue (%) (12.5) 2.1 1.9 (0.5) 9.7 Dividend (1,339.1) (1,339.1) (1,339.1) (1,339.1) (1,339.1)
EBITDA (%) (18.0) 26.3 5.1 1.8 1.4 Net Borrowing 1,096.3 1,096.3 (300.0) (300.0) (300.0)
PBT (%) (31.8) 12.5 (105.8) (2,721.7) 5.4 Others (579.8) (579.8) 0.0 0.0 0.0
Core Net Profit (%) (32.7) 29.4 36.0 (1.7) 5.4 CFF (822.6) (822.6) (1,639.1) (1,639.1) (1,639.1)
Core EPS (%) (32.7) 29.4 36.0 (1.7) 5.4
Net Cash Flow (361.9) (361.9) 621.1 651.1 696.1
*
Page 11 of 24
21-Dec-20
Malaysia Marine Heavy Engineering TP: RM0.50 (+9.9%)

Last Traded: RM0.46
Weak Earnings but Orderbook Recovery Looms HOLD

1. Weak Earnings Visibility. MMHE’s current outstanding orderbook of Listing Code MMHE MK
USD2.5bn largely consists of a single project. The latter refers to the RM2.2bn Stock Code 5186
Kasawari Central Processing Platform secured back in Jul-19. Orderbook Listing Main Market
replenishment has been excruciatingly slow, whereby the group merely Share Cap (m) 1,600
secured RM4.6mn worth of orders YTD20. Therefore, this translates to weak Market Cap (RM 'mn) 736
earnings visibility for the Offshore segment in the near-to-medium term. Par Value (RM) 0.50
Furthermore, there is a time lag for earnings to flow-in from any new 52-wk Hi/Lo (RM) 0.97/0.26
Offshore contracts, particularly large projects. This is due to back-loaded 12-mth Avg Daily Vol ('000) 2,087.7
earnings recognition from the Group’s application of square method Estimated Free Float (%) 11.2
accounting. Beta 2.1
2. First Beneficiary to Capex Recovery. Rebound in offshore capex spend Major Shareholders (%)
in 2021 is anticipated to boost MMHE’s orderbook prospects. According to MISC Bhd 66.5
industry research consultancy, Westwood Global, offshore awards are set to Technip S.A 8.5
bounce back in 2021. This is underpinned by an expected 72 final investment Forecast Revision (%)
decisions for offshore projects and circa USD45bn of Engineering, FY20 FY21
Procurement and Construction (EPC) contracts up for grabs (2020: Forecast Revision (%) 0 0
USD17bn). Furthermore, EPC awards are expected to balloon to USD55bn in Core Net Profit (RM mn) (165.7) 9.1
2022. On the same optimistic note, based on Rystad Energy estimates, O&G Consensus (RM mn) (73.6) 13.5
project sanctions are expected to rebound and surge to USD100bn in 2021 TA/Consensus (%) 225.1 67.6
(2020E: USD34bn, 2019: USD101bn). Out of this amount, USD64bn will be Previous Rating Sell (Upgraded)
spent on Offshore projects (2020: USD34bn).
3. Aggressively Tendering for Global Projects. According to Upstream, Financial Indicators
MMHE is in the running for various local and international project tenders. FY20 FY21
This includes the Jerun CPP tender (expected award: 1Q21), which has Net Debt/Equity (x) Net Cash Net Cash
narrowed down to a two-way race between Sapura Energy (SAPE) and MMHE. ROA (%) (5.6) 0.3
According to sources, MMHE’s edge over SAPE lies in its lower bid. ROE (%) (7.5) 0.4
Additionally, Saudi Aramco has tendered an EPCI contract for further NTA/Share (RM) 1.4 1.4
development of its giant Safaniyah field. The tender is open to its pre-qualified P/NTA (x) 0.3 0.3
pool of Long-Term Agreement contractors. Lastly, Petronas is contemplating
a bid war between local offshore fabricators to build minimum facility Share Performance
wellhead platforms (MWHP). This initiative forms part of Petronas’ Design Price Change (%) MMHE FBM KLCI
One, Build Many project for lightweight offshore platforms. The bidding 1 mth 22.7 3.0
exercise may involve about 20 MWHPs- where several will be completed 3 mth 35.3 9.7
annually over 4-5 years. 6 mth 9.5 9.8
Risks 12 mth (45.9) 3.3
Marine Recovery. Upliftment of international borders could take place (12-Mth) Share Price relative to the FBMKLCI
sooner-than expected. This is underpinned by expectations that swift Covid-
19 vaccine distribution will effectively contain global spread of infections. To
recap, international vessels are barred from docking at MMHE’s yard due to
border lockdowns. Hence, pent-up demand for vessel dry docking services
will catalyse MMHE’s near-term earnings recovery.
Recommendation
On the back of the catalysts above, we upgrade our valuation on MMHE to
0.35x CY21 P/B (previous: 0.2x). Correspondingly, our target price (TP) is Source: Bloomberg
raised to RM0.50 (previous: RM0.28) and we upgrade MMHE to Hold (previous:
Sell).
Page 12 of 24
21-Dec-20
Earnings Summary
Revenue 974.4 1,009.5 1,155.2 1,408.1 1,815.8 Fixed assets 1,595.2 1,716.2 1,729.5 1,761.5 1,823.3
EBITDA (68.1) 23.5 (144.7) 86.0 122.4 Land Use Rights 209.3 216.3 216.3 216.3 216.3
Depreciation & Amort (77.7) (75.9) (79.2) (80.6) (83.4) JCEs 7.8 9.1 10.5 11.9 13.3
Net finance cost 14.3 17.9 15.3 3.4 2.3 Others 93.3 93.3 93.3 93.3 93.3
Share of JCEs 3.0 1.3 1.4 1.4 1.4 Non-Current Assets 1,905.5 2,034.9 2,049.5 2,082.9 2,146.2
Exceptionals 4.3 (6.6) (208.7) 0.0 0.0
Pretax profit (124.2) (39.8) (415.9) 10.2 42.6 Inventories 5.6 4.4 5.0 6.1 7.8
Taxation (0.1) 5.5 41.6 (1.0) (4.3) Trade and other rcvb 669.8 502.3 791.3 964.4 1,243.7
MI 1.5 (0.0) (0.1) 0.0 0.0 Cash and Deposits 589.3 671.9 116.0 78.7 32.8
Net Profit (122.7) (34.2) (374.4) 9.1 38.4 Others 20.5 2.8 2.8 2.8 2.8
Core Net Profit (127.0) (27.6) (165.7) 9.1 38.4 Current Assets 1,285.3 1,181.3 915.0 1,051.9 1,287.0
EPS (sen) (7.9) (1.7) (10.4) 0.6 2.4
DPS (sen) 0.0 0.0 0.0 0.0 0.0 Borrowings 48.4 178.9 0.0 0.0 0.0
BPS (RM) 1.5 1.5 1.4 1.4 1.4 Non-current liabilities 48.4 187.5 8.6 8.6 8.6
Net Tang Asset (RM) 1.5 1.5 1.4 1.4 1.4
Borrowings 0.0 0.0 0.0 0.0 0.0
Ratios Trade & other Payables 735.6 643.7 736.6 897.8 1,157.7
FYE 31 Dec (RMmn) 2018 2019 2020E 2021F 2022F Others 0.0 3.6 3.6 3.6 3.6
Valuations Current Liabilities 735.6 647.2 740.1 901.3 1,161.3
PER (x) (5.8) (26.6) (4.4) 80.5 19.2
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 Total Liabilities 784.0 834.7 748.7 909.9 1,169.9
EV/EBITDA (x) (2.9) 10.7 (4.3) 7.8 5.8
P/BV (x) 0.3 0.3 0.3 0.3 0.3 Share capital 1,618.3 1,618.3 1,618.3 1,618.3 1,618.3
P/NTA (x) 0.3 0.3 0.3 0.3 0.3 Reserves 788.8 754.0 588.3 597.5 635.8
FCF Yield (%) (16.0) (11.8) (55.9) (5.5) (6.5) Minority Interests -0.3 9.2 9.2 9.2 9.2
Equity 2,406.8 2,381.4 2,215.8 2,224.9 2,263.3
Profitability ratios
EBITDA margin (%) (7.0) 2.3 (12.5) 6.1 6.7 Total Equity + Liabilities 3,190.8 3,216.1 2,964.5 3,134.9 3,433.2
EBIT margin (%) (15.0) (5.2) (19.4) 0.4 2.1
PBT margin (%) (12.7) (3.9) (36.0) 0.7 2.3 FYE 31 Dec (RMmn) 2018 2019 2020E 2021F 2022F
Net margin (%) (13.0) (2.7) (14.3) 0.6 2.1 Cash Flow Statement
ROE (%) (5.3) (1.2) (7.5) 0.4 1.7 Pretax profit (124.2) (39.8) (415.9) 10.2 42.6
ROA (%) (4.0) (0.9) (5.6) 0.3 1.1 Depreciation 77.7 75.9 79.2 80.6 83.4
Net Interest (14.3) (17.9) (15.3) (3.4) (2.3)
Liquidity ratios JCEs (3.0) (1.3) (1.4) (1.4) (1.4)
Current ratio (x) 1.7 1.8 1.2 1.2 1.1 Working Cap Changes 102.5 76.9 (196.7) (13.1) (21.1)
Quick ratio (x) 1.7 1.8 1.2 1.2 1.1 Interest Received 15.2 17.9 18.9 3.4 2.3
Income Tax Paid (0.1) 5.5 41.6 (1.0) (4.3)
Leverage ratios Others (2.6) 3.4 208.7 0.0 0.0
Total Debt/ Assets (x) 0.02 0.06 0.00 0.00 0.00 CF from Operations 51.4 120.6 (281.0) 75.3 99.3
Net Gearing (x) Net Cash Net Cash Net Cash Net Cash Net Cash Capex (152.2) (179.9) (92.4) (112.6) (145.3)
Interest coverage (x) n.m. n.m. n.m. n.m. n.m. Interest Expense (0.9) 0.0 (3.6) 0.0 0.0
Others 15.7 3.6 0.0 0.0 0.0
Growth ratios CF from Investing (137.3) (176.3) (96.0) (112.6) (145.3)
Revenue (%) 0.0 3.6 14.4 21.9 29.0
EBITDA (%) (1.7) (134.5) (715.7) (159.4) 42.3 Dividends 0.0 0.0 0.0 0.0 0.0
PBT (%) (12.3) (68.0) 946.1 (102.4) 319.8 Others (11.9) 126.1 (178.9) 0.0 0.0
Net Profit (%) (4.6) (72.1) 994.0 (102.4) 319.8 CF from Financing (11.9) 126.1 (178.9) 0.0 0.0
Core EPS (%) (3.4) (78.2) 499.5 (105.5) 319.8
Net Cash Flow (97.8) 70.4 (555.9) (37.3) (45.9)
Key Assumptions Beginning Cash 674.9 577.1 671.9 116.0 78.7
Order Replenishment (RM 'mn) 144 2,644 400 800 800 Ending Cash 577.1 647.5 116.0 78.7 32.8
Page 13 of 24
21-Dec-20
Pantech Group Holdings Bhd TP: RM0.29 (-28.4%)

Last Traded: RM0.41
Lack of Catalysts Whilst Awaiting Demand Pick-Up SELL
Investment Themes
Share Information
1. Lack of Catalysts. Since completion of RAPID contracts back in FY19,
Pantech lacks material earnings catalysts. To recap, RAPID contributed more Bloomberg Code PGHB MK
than 20% of group revenues in FY17-19. Since the project’s completion, the Stock Code 5125
Group has not been able to fill the earnings gap. On the bright side, there Listing Main Market
are plans for Phase 2 development of new petrochemical projects in Share Cap (m) 747.0
Pengerang. However, we do not expect this to materialize in the near term Market Cap (RMm) 302.5
due to market uncertainty caused by the Covid-19 (C-19) pandemic. Whilst 52-wk Hi/Lo (RM) 0.52/0.25
Pantech is keen to deploy its balance sheet for mergers and acquisitions 12-mth Avg Daily Vol ('000) 1,199.0
(M&A), such deals will likely be bite-sized, as guided by management. As Estimated Free Float (%) 49.6
such, we do not expect any future M&As to have a meaningful impact on Beta 1.4
earnings. Recall that the Group’s most recent M&A comprised of a small Major Shareholders (%)
scale hot-dip galvanizing plant (start: Dec-16) with capacity of 48k tonnes p.a. CTL Capital - 18.2
GL-Management - 13.1
2. Time Lag before Orders Flow-In. Being a subcontractor and supplier to
EPF - 6.1
EPCC (Engineering, Procurement, Construction, and Commissioning) contractors,
there is a significant time lag between offshore contract awards and actual
FY21 FY22
orders. Whilst we believe in the possibility of a revival in offshore capex
following resolution of C-19 headwinds, Pantech would only benefit at a later
stage. This is because typically, oil companies would first award turnkey Net profit (RM mn) 16.1 30.1
projects to EPCC players. Therefore, procurement of Pantech’s products by Consensus 17.5 32.0
EPCC contractors will only take place after completion of the detailed TA/Consensus 92 94
engineering phase. For large projects, the latter process could take up to a Previous Rating Sell (Maintained)
year. As such, we believe it may be too early to bank on near-to-medium
term earnings uplift for Pantech. Financial Indicators
3. USD Weakness Erodes Profits. Pantech is a net beneficiary of USD- FY21 FY22
strength given that circa 40% of the Group’s revenue comprises exports. Net debt/equity (x) (0.1) (0.1)
The latter is largely denominated in US Dollar (USD), and to a lesser extent, ROA (%) 1.7 3.1
GBP. According to management, every 1% drop in USD/MYR would lead to ROE (%) 2.4 4.4
a corresponding to1% drop in profits. To recap, our in-house economics NTA/Share (RM) 0.9 0.9
team expects USD depreciation to sustain in 2021. This is underpinned by P/NTA (x) 0.5 0.4
the likelihood that C-19 vaccines will be widely distributed and hence revive
global economic growth. In turn, this would result in the USD losing its Share Performance
appeal as a safe-haven asset. Additionally, the US central bank is also Price Change (%) Pantech FBMKLCI
committed to keep rates low even if inflation spikes up.
1 mth 2.5 3.0
3 mth 11.0 9.7
Risk 6 mth 10.6 9.8
Faster than Expected Demand Recovery. Accelerated launch of O&G 12 mth (17.4) 3.3
projects, including Pengerang Phase 2 may result in a sooner-than-expected
spike up in demand for Pantech’s products. Coupled with the resumption of (12-Mth) Share Price relative to the FBMKLCI
US exports in 2QFY20, this would result in impressive YoY earnings
improvement.
Recommendation
We recommend Sell on Pantech with target price (TP) of RM0.29 based on
8x CY21 P/E.
Source: Bloomberg
Page 14 of 24
21-Dec-20
Earnings Summary
FYE 28 Feb (RMmn) 2019 2020 2021E 2022F 2023F FYE 28 Feb (RMmn) 2019 2020 2021E 2022F 2023F
Revenue 609.2 602.5 405.1 529.7 584.0 Fixed assets 230.6 342.6 330.3 321.2 313.8
EBITDA 87.5 74.9 52.4 65.4 71.5 Associates & JCEs 2.8 2.8 2.9 2.9 2.9
Net finance cost (9.6) (10.1) (9.6) (5.9) (7.0) Non-Current Assets 289.2 355.1 342.8 333.8 326.5
Share of Associates & JV 0.7 0.0 0.0 0.0 0.0 Inventories 356.5 305.6 194.3 254.0 280.1
EI 0.5 0.9 0.0 0.0 0.0 Trade and other rcvb 157.3 126.6 80.5 105.2 116.0
Pretax profit 61.6 46.7 21.7 39.1 44.5 Cash and Deposits 51.2 88.6 274.7 238.3 243.9
Taxation (14.0) (10.9) (5.6) (9.0) (10.2) Others 37.3 35.8 35.8 35.8 35.8
MI 0.0 0.0 0.0 0.0 0.0 Current Assets 602.3 556.6 585.3 633.3 675.8
Core Net Profit 47.6 35.9 16.1 30.1 34.2
Total Assets 891.5 911.7 928.1 967.1 1,002.3
Per Share Data
Core EPS (sen) 6.4 4.7 2.2 4.0 4.6 Borrowings 49.0 52.6 57.2 59.0 60.8
Fully-diluted EPS (sen) 6.1 4.6 2.1 3.9 4.4 Others 5.4 23.6 23.6 23.6 23.6
DPS (sen) 2.0 1.9 0.6 1.2 1.4 Non-current liabilities 54.4 76.1 80.8 82.6 84.4
Book Value (RM) 0.8 0.9 0.9 0.9 1.0 Borrowings 194.7 132.2 133.5 137.7 141.9
Net Tang Asset (RM) 0.8 0.9 0.9 0.9 1.0 Trade & other Payables 48.1 39.7 38.8 50.8 56.0
Others 7.6 5.7 5.7 5.7 5.7
Ratios Current Liabilities 250.4 177.6 178.1 194.3 203.7
FYE 28 Feb (RMmn) 2019 2020 2021E 2022F 2023F
Valuations Total Liabilities 304.8 253.7 258.9 276.8 288.1
PER (x) 6.4 8.7 18.8 10.0 8.8
Dividend yield (%) 5.0 4.7 1.6 3.0 3.4 Share capital 208.3 209.9 209.9 209.9 209.9
EV/EBITDA (x) 5.7 5.3 4.2 4.0 3.7 Reserves 378.4 448.0 459.3 480.4 504.3
P/BV (x) 0.5 0.5 0.5 0.4 0.4 Minority Interests - - - - -
P/NTA (x) 0.5 0.5 0.5 0.4 0.4 Equity 586.7 658.0 669.2 690.3 714.2
Profitability ratios Total E&L 891.5 911.7 928.1 967.1 1,002.3

EBITDA margin (%) 14.4 12.4 12.9 12.3 12.2
EBIT margin (%) 11.6 9.4 7.7 8.5 8.8 Cash Flow Statement
PBT margin (%) 10.1 7.8 5.4 7.4 7.6 FYE 28 Feb (RMmn) 2019 2020 2021E 2022F 2023F
Core Net margin (%) 7.8 6.0 4.0 5.7 5.9 Pretax profit 61.6 46.7 21.7 39.1 44.5
ROE (%) 8.1 5.4 2.4 4.4 4.8 Depreciation 17.0 18.1 21.1 20.5 20.0
ROA (%) 5.3 3.9 1.7 3.1 3.4 Net Interest 9.6 10.1 9.6 5.9 7.0
Associates & JCEs (0.7) (0.0) (0.0) (0.0) (0.0)
Liquidity ratios Working Cap Changes (75.7) 73.2 156.6 (72.6) (31.6)
Current ratio (x) 2.4 3.1 3.3 3.3 3.3 Tax Paid (14.0) (10.9) (5.6) (9.0) (10.2)
Quick ratio (x) 1.0 1.4 2.2 2.0 1.9 Others (13.9) 9.3 0.0 0.0 0.0
CF from Operations (16.0) 146.6 203.3 (16.1) 29.6
Leverage ratios
Total Debt/ Assets (x) 0.3 0.2 0.2 0.2 0.2 Capex (21.6) (13.0) (8.8) (11.5) (12.6)
Total Debt/Equity (x) 0.4 0.3 0.3 0.3 0.3 Interest Received 0.9 1.1 1.9 6.0 5.2
Net debt(cash)/ Equity (x) 0.3 0.1 (0.1) (0.1) (0.1) Others (13.4) (1.0) 0.0 0.0 0.0
CF from Investing (34.1) (12.9) (6.8) (5.4) (7.4)
Growth ratios
Revenue (%) (1.1) (1.1) (32.8) 30.8 10.3 Dividends (11.1) (11.1) (4.8) (9.0) (10.3)
PBT (%) (24.2) (24.2) (53.5) 80.0 13.8 Net Change in Debt 75.9 (59.0) 6.0 6.0 6.0
Core Net Profit (%) (24.7) (24.7) (55.2) 87.3 13.8 Interest Paid (10.5) (11.2) (11.5) (11.9) (12.3)
Others (22.2) (12.5) 0.0 0.0 0.0
Key Assumptions CF from Financing 32.1 (93.8) (10.4) (14.9) (16.5)
Carbon Steel (%) 38 60 70 90 90
Stainless Steel (%) 90 75 70 90 90 Net Cash Flow (18.0) 39.9 186.1 (36.5) 5.7
Nautic (%) 65 50 70 70 70 Beginning Cash 70.2 49.0 88.6 274.7 238.3
Growth (Trading Revenue) (%) 8.5 (8.0) (30.0) 15.0 15.0 Exchange Rates (1.1) (0.3) 0.0 0.0 0.0
Ending Cash 51.2 88.6 274.7 238.3 243.9
Page 15 of 24
21-Dec-20
Petronas Chemicals Group Bhd TP: RM9.10 (+20.1%)

Last Traded: RM7.58
Product Price Strength due to High Demand BUY
Investment Themes
1. Polymer and Paraxylene Price Strength. Pet Chem currently benefits Share Information
from high polymer prices on the back of strong demand for plastics, Bloomberg Code PCHEM MK
packaging materials and Personal Protective Equipment (PPE). This emanates Stock Code 5183
from sustained Covid-19 (C-19) infection and lockdowns worldwide. Listing Main Market
Furthermore, we anticipate that upcoming vaccination campaigns will keep Share Cap (mn) 8,000
PPE usage at high levels. Thus, this is expected to sustain solid demand for Market Cap (RMmn) 60,640
medical PPE and single use plastics (for usage in e-commerce and food Par Value (RM) 0.10
deliveries). On top of that, according to ICIS, strong polyester production in 52-wk Hi/Lo (RM) 7.96/4.00
China will continue to drive demand and prices for paraxylene (PX). 12-mth Avg Daily Vol ('000 shrs) 4,234.1
Estimated Free Float (%) 16.3
2. Tight Market for Ethane Chain. Based on IHS data, total ethylene
Beta 1.90
capacity outage in Asia could increase to 10%-15% of total capacity in 4Q20F
Major Shareholders (%) Petronas - 64.4
(4Q19: 8-9%). This is mainly driven by: (1) temporary shutdown of LG
EPF - 8.8
Chem’s (capacity: 1.16mn tpa) naphtha cracker in Yeosu Korea in Nov-20,
Skim Amanah Saham - 7.1
(2) delay in start-up of Lotte Chemical’s naphtha cracker in Daesan to early-
Jan 21 (original: Nov 20), and (3) shutdown of Siam Cement’s Map Ta Phut
FY20 FY21
olefin cracker (ethylene capacity: 900ktpa). The above should tighten market
supply for ethane chain products in 4Q20F. Forecast Revision (%) 0.0 0.0
Core Net Profit (RM mn) 1,445.8 2,506.0
3. Cool Down of US-China Trade War. We believe in the possibility of a Consensus 1,665.8 2,597.3
cool-down in the US-China trade war. This is given the upcoming TA/Consensus (%) 86.8 96.5
inauguration of Joe Biden as US president to replace Donald Trump. To Previous Rating Buy (Maintained)
recap, in mid-18, Trump imposed tariffs on USD370bn worth of Chinese
imports, including chemicals. In retaliation, Beijing imposed tariffs on circa Financial Indicators
USD200bn of US imports. This includes chemicals produced by Pet Chem FY20 FY21
such as polymers, aromatics, methanol, etc. As a result, this had led to Net Debt/Equity (x) Net Cash Net Cash
product dumping by US chemical producers in South East Asian markets. ROA (%) 3.8 6.6
Thus, this had resulted in product price and spread compression. In our
ROE (%) 4.8 8.0
view, Biden will unlikely implement new tariffs on China that will disrupt
petrochemical trade flows. Recall that Biden had criticized Trump’s
P/NTA (x) 2.0 2.0
application of tariffs as “reckless” and slammed his trade war with China.
Risks Share Performance
Reversal of Tight Polymer Market Conditions. According to IHS, Price Change (%) PCHEM FBMKLCI
polymer supplies will increase towards end-21, underpinned by: (1) new 1 mth 12.3 3.0
capacity in China that were previously delayed due to C-19 will be 3 mth 35.4 9.7
commissioned in Aug-Oct, and (2) various plants in China will emerge from 6 mth 18.8 9.8
their maintenance shutdowns by 4Q20. Therefore, the rate of capacity 12 mth 2.7 3.3
additions is expected to exceed demand growth in 2021.
Recommendation
We have a Buy recommendation on Pet Chem with target price (TP) of
RM9.10 based on 14x CY21 EV/EBITDA.
Source: Bloomberg
Page 16 of 24
21-Dec-20
Earnings Summary
Revenue 19,576.0 16,370.0 14,007.1 16,766.2 19,271.2 Fixed assets 19,080.0 20,482.0 20,301.7 20,618.9 20,911.9
EBITDA 7,216.0 4,561.0 3,275.7 4,385.8 5,142.4 Associates & JCEs 1,232.0 1,058.0 874.0 690.7 501.1
Depreciation (1,619.0) (1,659.0) (1,680.3) (1,682.8) (1,707.0) Intangibles 0.0 584.0 584.0 584.0 584.0
Net finance cost 298.0 346.0 231.3 321.1 246.9 Others 294.0 971.0 971.0 971.0 971.0
Associates 108.0 (54.0) (59.4) (58.0) (63.8) Non-Curr Assets 20,606.0 23,095.0 22,730.7 22,864.6 22,968.0
Exceptionals (247.0) (39.0) 51.0 0.0 0.0
Pretax Profit 5,756.0 3,155.0 1,818.2 2,966.1 3,618.5 Inventories 1,698.0 1,658.0 1,315.8 1,272.7 1,274.9
Taxation (882.0) (360.0) (290.9) (444.9) (542.8) Trade and oth Rcvb 2,668.0 1,994.0 1,821.2 1,765.8 1,691.3
MI 86.0 (16.0) (30.5) (15.1) (18.5) Cash and Deposits 12,329.0 12,045.0 12,372.4 11,757.3 13,144.4
Net Profit 4,960.0 2,779.0 1,496.8 2,506.0 3,057.3 Others 64.0 71.0 71.0 71.0 71.0
Core Net Profit 5,207.0 2,818.0 1,445.8 2,506.0 3,057.3 Current Assets 16,759.0 15,768.0 15,580.4 14,866.9 16,181.6
Core EPS (sen) 65.1 35.2 18.1 31.3 38.2
DPS (sen) 32.0 18.0 13.0 18.0 21.0 Borrowings 0.0 1,875.0 1,500.0 0.0 0.0
Book Value (RM) 3.7 3.7 3.8 3.9 4.1 Deferred Tax 1,320.0 906.0 906.0 906.0 906.0
Net Tang Asset (RM) 3.7 3.7 3.7 3.9 4.0 Others 583.0 2,326.0 2,326.0 2,326.0 2,326.0
Non-current Liab 1,903.0 5,107.0 4,732.0 3,232.0 3,232.0
Ratios
FYE 31 Dec 2018 2019 2020E 2021F 2022F Borrowings 2,072.0 0.0 0.0 0.0 0.0
Valuations Trade & other Pyb 3,001.0 3,063.0 2,406.5 2,309.4 2,333.3
Core PER (x) 11.6 21.5 41.9 24.2 19.8 Others 141.0 155.0 155.0 155.0 155.0
Dividend yield (%) 4.2 2.4 1.7 2.4 2.8 Current Liabilities 5,214.0 3,218.0 2,561.5 2,464.4 2,488.3
EV/EBITDA (x) 7.1 11.2 15.4 11.3 9.4
P/BV (x) 2.1 2.0 2.0 1.9 1.9 Total Liabilities 7,117.0 8,325.0 7,293.5 5,696.4 5,720.3
P/NTA (x) 2.1 2.1 2.0 2.0 1.9
FCF Yield (%) 6.5 (52.2) 2.7 3.3 4.2 Share capital 8,871.0 8,871.0 8,871.0 8,871.0 8,871.0
Reserves 20,693.0 21,062.0 21,511.0 22,513.4 23,889.2
Profitability ratios Minority Interests 684.0 605.0 635.5 650.7 669.1
EBITDA margin (%) 36.9 27.9 23.4 26.2 26.7 Equity 30,248.0 30,538.0 31,017.6 32,035.1 33,429.4
EBIT margin (%) 28.6 17.7 11.4 16.1 17.8
PBT margin (%) 29.4 19.3 13.0 17.7 18.8 Total Equity + Liab 37,365.0 38,863.0 38,311.0 37,731.5 39,149.6
Core Net margin (%) 26.6 17.2 10.3 14.9 15.9
ROA (%) 13.9 7.3 3.8 6.6 7.8 FYE 31 Dec (RMmn) 2018 2019 2020E 2021F 2022F
Pretax profit 5,756.0 3,155.0 1,818.2 2,966.1 3,618.5
Liquidity ratios Depreciation 1,619.0 1,659.0 1,680.3 1,682.8 1,707.0
Current ratio (x) 3.2 4.9 6.1 6.0 6.5 Net Interest (298.0) (346.0) (231.3) (321.1) (246.9)
Quick ratio (x) 2.9 4.4 5.6 5.5 6.0 Associates & JCEs (108.0) 54.0 59.4 58.0 63.8
Working Cap Chg (489.0) 776.0 (141.5) 1.4 96.2
Leverage ratios Interest Received 315.0 377.0 204.8 309.3 246.9
Total Debt/ Assets (x) 0.06 0.05 0.04 0.00 0.00 Income Tax Paid (882.0) (360.0) (290.9) (444.9) (542.8)
Total Debt/Equity (x) 0.07 0.06 0.05 0.00 0.00 Others 754.0 229.0 0.0 0.0 0.0
Net Gearing (x) Net Cash Net Cash Net Cash Net Cash Net Cash CF from Operations 6,667.0 5,544.0 3,099.0 4,251.5 4,942.7
Interest coverage (x) n.m. n.m. n.m. n.m. n.m.
Capex (2,913.0) (2,351.0) (1,500.0) (2,000.0) (2,000.0)
Growth ratios Divid from Assoc 124.0 124.0 124.6 125.2 125.9
Revenue (%) 12.5 (16.4) (14.4) 19.7 14.9 Others 950.0 (800.0) 0.0 0.0 0.0
EBITDA (%) 8.9 (36.8) (28.2) 33.9 17.3 CF from Investing (1,839.0) (3,027.0) (1,375.4) (1,874.8) (1,874.1)
PBT (%) (45.2) (45.2) (42.4) 63.1 22.0
Core Net Profit (%) (45.9) (45.9) (48.7) 73.3 22.0 Dividends (2,645.3) (1,429.2) (1,047.7) (1,503.6) (1,681.5)
Core EPS (%) (44.1) (45.9) (48.7) 73.3 22.0 Net Chg in debt 2,072.0 (197.0) (375.0) (1,500.0) 0.0
Interest Paid (17.0) (31.0) 26.5 11.8 0.0
Key Assumptions Others 1,422.3 (1,100.8) 0.0 0.0 0.0
Utilisation Rate - O&D 97% 98% 90% 85% 95% CF from Financing 832.0 (2,758.0) (1,396.2) (2,991.8) (1,681.5)
Utilisation Rate - F&M 89% 89% 90% 85% 95%
Utilisation Rate - Overall 92% 89% 90% 85% 95% Net Cash Flow 5,660.0 (241.0) 327.4 (615.1) 1,387.1
Beginning Cash 6,669.0 12,329.0 12,045.0 12,372.4 11,757.3
Ending Cash 12,329.0 12,045.0 12,372.4 11,757.3 13,144.4
Page 17 of 24
21-Dec-20
Serba Dinamik Holdings Bhd TP: RM2.10 (+21.4%)

Last Traded: RM1.73
Resilient and Growing BUY
1. Orderbook Traction Unperturbed by Downcycles. Serba’s current Bloomberg Code SDH MK
outstanding orderbook of RM18.7bn translates to strong revenue visibility Stock Code 5279
of close to 3 years. Furthermore, the Group has managed to prove its Listing Main Market
prowess in orderbook replenishment in spite of oil price downcycles. Share Cap (mn) 3,372.8
YTD20, Serba announced new contract wins totalling a staggering Market Cap (RMmn) 5,834.9
RM11.3bn. This includes a USD1.8bn (RM7.7bn) blockbuster contract win 52-wk Hi/Lo (RM) 2.52/1.02
for Block 7 integrated development in Abu Dhabi. Based on current 12-mth Avg Daily Vol ('000 shrs) 12,986
momentum, management will likely exceed its ambitious target to achieve Estimated Free Float (%) 32.9
end-FY20 outstanding orderbook of RM15bn (+50% YoY). Beta 1.5
Major Shareholders (%)
2. Primed to Leverage Immediately on Recovery. The Group’s new
Mohd Abdul Karim - 26.9
projects are ready to latch on new business when economic recovery kicks-
Abdul Kadier Sahib - 17.6
in over the medium term. This includes: (1) Bintulu Integrated Energy Hub
(launch: 1Q21), (2) Teluk Ramunia Fabrication Yard (launch: early-21), and EPF - 9.5
Forecast Revision
(3) Pengerang Eco-Industrial Park (launch: 2Q21). These projects will drive
FY20 FY21
the Group’s multi-year capacity and earnings expansion.
3. Diversified and Resilient Earnings Profile. Serba’s 9M20 earnings Core Net Profit (RMm) 592.1 685.4
(+23% YTD) growth in spite of economic recession is testament of its Consensus 582.3 668.7
resilient business and stellar execution. On top of that, this is possible via TA's / Consensus (%) 102 103
its diversified earnings stream and markets. Serba’s successful diversification Buy (Maintained)
Previous Rating
into Information, Communication and Technology (ICT) projects has
boosted this segment to a meaningful 11% of total orderbook. Therefore,
the Group has reduced its vulnerability to oil price fluctuations and industry
FY20 FY21
concentration risk. This is given that O&G projects only comprise 40% of
Net Debt / Equity (x) 0.8 0.9
outstanding orderbook. Furthermore, the Group has a global footprint,
ROA (%) 7.7 7.8
whereby 51% of its orderbook is spread outside of its core Middle East
ROE (%) 20.7 20.5
market.
Risk Price/NTA (x) 2.0 1.7
Execution Risks. Serba’s diversification outside of its core competency of
Maintenance, Repair and Overhaul for O&G projects may lead to execution Share Performance (%)
risks. Furthermore, recent new contracts secured by Serba are massive in Price Change SDH FBM KLCI
scale, particularly EPCC contracts in Abu Dhabi for Block 7 and USD350mn 1 mth 1.8 3.0
(RM1.5bn) data centre. Therefore, this raises concerns that Serba will 3 mth 0.6 9.7
struggle with execution and working capital funding. 6 mth 6.1 9.8
12 mth (14.8) 3.3
Recommendation
The stock is currently trading at attractive valuation of -1SD below (12-Mth) Share Price relative to the FBMKLCI
historical average forward P/E. This is in spite of: (1) successful
diversification into ICT, (2) proven resilient earnings growth regardless of
economic cycles, and (3) all-time high orderbook. Our target price (TP) for
Serba is RM2.10, based on 10.5x CY21 PER. Maintain Buy.
Source: Bloomberg
Page 18 of 24
21-Dec-20
Earnings Summary
Revenue 3,283.2 4,528.6 5,365.0 7,320.0 8,195.0 PPE 1,273.1 1,928.7 2,313.2 2,482.5 2,643.4
Core EBITDA 559.1 834.2 896.6 1,027.4 1,111.4 JV & Associates 305.9 391.8 430.3 469.3 508.6
Net finance cost (49.6) (182.8) (140.7) (154.6) (188.5) Non-Current Assets 1,586.4 2,339.1 2,762.1 2,970.4 3,170.5
Associate & JV 13.9 35.0 38.5 38.9 39.3 Inventories 848.3 919.6 1,204.7 1,673.8 1,792.7
Forex & EI 4.2 1.1 0.7 0.0 0.0 Trade receivables 957.3 1,265.2 1,599.3 2,120.5 2,368.8
PBT 437.6 544.8 660.5 781.0 823.1 Cash and equivalents 760.8 1,306.6 1,626.8 1,498.4 1,728.8
Taxation & Zakat (44.8) (46.8) (66.1) (93.7) (98.8) Others 218.0 523.8 523.8 523.8 523.8
MI (1.4) (1.3) (1.6) (1.9) (2.0) Current Assets 2,784.3 4,015.1 4,954.6 5,816.4 6,414.1
Net Profit 391.5 496.6 592.9 685.4 722.4 TOTAL ASSETS 4,370.8 6,354.2 7,716.7 8,786.7 9,584.6
Core Net Profit 387.3 495.5 592.1 685.4 722.4
LT Borrowings 1,107.5 2,946.7 3,562.2 3,913.9 4,089.7
Per Share Data Others 86.5 46.7 46.7 46.7 46.7
Core EPS* (sen) 11.7 14.8 17.6 20.3 21.4 Non-Current Liabilities 1,194.0 2,993.4 3,608.8 3,960.5 4,136.4
DPS (sen) 3.8 3.6 5.0 6.0 6.0 Trade payables 426.5 452.5 689.1 874.2 950.0
BVPS (RM) 0.6 0.7 0.8 1.0 1.1 ST Borrowings 604.0 404.7 489.3 537.6 561.7
NTA/Share (RM) 0.6 0.7 0.8 1.0 1.1 Others 54.0 63.7 63.7 63.7 63.7
Current Liabilities 1,084.5 920.9 1,242.1 1,475.5 1,575.5
Ratios Share Capital 1,344.3 1,344.3 1,344.3 1,344.3 1,344.3
FYE 31 Dec (RMmn) 2018 2019 2020E 2021F 2022F Reserves 743.8 1,088.4 1,512.7 1,995.8 2,515.9
Valuations MI 4.1 7.2 8.8 10.6 12.6
Core PER (x) 14.8 11.7 9.9 8.5 8.1 Total Equity 2,092.3 2,439.9 2,865.8 3,350.7 3,872.8
Div. Yield (%) 2.2 2.1 2.9 3.5 3.5 TOTAL E&L 4,370.8 6,354.2 7,716.7 8,786.7 9,584.6
P/BV (x) 2.8 2.4 2.0 1.7 1.5
FCF Yield (%) (8.5) (11.5) (1.4) (3.2) 6.9 Cash Flow Statement
FYE 31 Dec (RMmn) 2,018.0 2,019.0 2020E 2021F 2022F
Profitability ratios Pretax profit 437.6 544.8 660.5 781.0 823.1
Core EBITDA margin (%) 17.0 18.4 16.7 14.0 13.6 Depreciation 89.9 142.7 134.6 130.7 139.1
Core EBIT margin (%) 14.3 15.3 14.2 12.3 11.9 Net interest 49.6 182.8 140.7 154.6 188.5
PBT margin (%) 13.3 12.0 12.3 10.7 10.0 JV & Associate (13.9) (35.0) (38.5) (38.9) (39.3)
Core Net Margin (%) 11.8 10.9 11.0 9.4 8.8 Changes in WC (454.9) (578.0) (382.7) (805.1) (291.4)
Core ROE (%) 18.5 20.4 20.7 20.5 18.7 Tax (44.8) (46.8) (66.1) (93.7) (98.8)
Core ROA (%) 8.9 7.8 7.7 7.8 7.5 Others 19.7 2.1 0.0 0.0 0.0
Operational cash flow 83.2 212.6 448.6 128.5 721.3
Liquidity ratios
Current ratio (x) 2.6 4.4 4.0 3.9 4.1 Capex (551.9) (868.2) (519.1) (300.0) (300.0)
Quick ratio (x) 1.8 3.4 3.0 2.8 2.9 Interest income 12.5 21.5 25.8 36.7 39.1
Investment in JV/Associate 0.0 0.0 0.0 0.0 0.0
Leverage ratios Others (319.2) (44.1) 0.0 0.0 0.0
Equity/total liabilities (x) 0.6 0.3 0.3 0.2 0.2 Investing cash flow (858.6) (890.8) (493.3) (263.3) (260.9)
Net debt / equity (x) 0.5 0.8 0.8 0.9 0.8
Issue of shares 416.2 0.0 0.0 0.0 0.0
Growth ratios Dividend paid (107.2) (141.4) (168.6) (202.3) (202.3)
Revenue (%) 20.6 37.9 18.5 36.4 12.0 Net borrowings 185.6 437.2 700.0 400.0 200.0
Core Net Profit (%) 27.1 28.0 19.5 15.8 5.4 Interest paid (62.1) (204.3) (166.6) (191.3) (227.6)
Others 810.3 1,220.1 0.0 0.0 0.0
Key Assumptions Financial cash flow 1,242.7 1,311.6 364.9 6.4 (229.9)
Orderbook Replenishment 12,000 7,000 6,000
Net cash flow 467.3 633.4 320.2 (128.4) 230.5
Beginning Cash 158.5 631.5 1,306.6 1,626.8 1,498.4
*Adjusted for bonus issue & share split Forex 5.7 0.0 0.0 0.0 0.0
Page 19 of 24
21-Dec-20
Uzma Bhd TP: RM0.61 (+1.7%)

Last Traded: RM0.60
Lacks Earnings Anchor SELL

1. Weak Near-Term Earnings. The Group’s business is still plagued by Bloomberg Code UZMA MK
project deferments by Petronas. To recap, the uzmAPRES fleet remains Stock Code 7250
suspended since 4QFY20 and is currently paid on discounted standby rates. Listing Main Market
Additionally, the Plug & Abandonment (P&A) contract from Shell (5 wells) Share Cap (mn) 320.0
will only recommence in early-21 after its suspension in Apr-20. Lastly, for Market Cap (RMmn) 190.4
Pulai P&A contract, works for additional 5-wells have been delayed. Given 52-wk Hi/Lo (RM) 1.03/0.31
the lack of significant earnings anchor to provide stable and recurring 12-mth Avg Daily Vol ('000 shrs) 7,737.3
earnings stream, Uzma’s earnings are subject to high volatility when its Estimated Free Float (%) 37.5
contracts are put on hold. In our view, Uzma needs more projects like its Beta 1.9
D18 Water Injection Facility contract to ensure a minimum earnings base Major Shareholders (%)
and avert from slipping into losses. Tenggiri Tuah - 34.5
2. High Dependency on Petronas. Uzma is heavily reliant on Petronas EPF - 4.9
contracts, as evident from its 85% revenue exposure in Malaysia. However, LTH - 4.7
we expect subdued capex (2020E: -16% YoY) and opex spend from Petronas Forecast Revision
in FY21. This is on the back of hefty dividend commitments to the FY21 FY22
government. To recap, Petronas will pay higher dividend of RM34bn (previous Forecast Revision (%) 0 0.0
guidance: RM24bn, 2019: RM54bn) to the Federal government in 2020. Net profit (RMm) 15.6 27.5
Furthermore, Petronas is expected to pay sales taxes to the states of Sabah Consensus 20.6 28.6
(RM1.25bn) and Sarawak (RM3bn). Moreover, client concentration risk TA's / Consensus (%) 76 96
reduces Uzma’s bargaining power, especially if Petronas requests for rate Previous Rating Sell (Maintained)
discounts. Recall this was the case back during the 2015-17 downcycle when
Petronas implemented cost optimization measures. As such, this could result
in margin erosion for Uzma.
FY21 FY22
3. Possible Fund Raising and Execution Risks. Management’s cognisance Net Debt / Equity (x) 1.1 1.1
of client and industry concentration risks have led to Uzma’s new CFPS (sen) 0.0 15.2
diversification plans. The Group plans to venture into New Energy, which Price / CFPS (x) >100 3.9
includes geothermal, digital, aerospace and other industries. As such, Uzma ROA (%) 1.2 2.1
may consider acquiring companies or forming collaborations for technology NTA/Share (RM) 1.4 1.5
development. On the back of this, we do not discount the possibility that Price/NTA (x) 0.4 0.4
the Group may need to raise monies to build a war chest for mergers and
acquisitions (M&A). Furthermore, Uzma’s lack of track record in New Share Performance (%)
Energy may potentially lead to execution risks. Price Change UZMA FBMKLCI
Risks 1 mth 25.0 3.0

Orderbook Replenishment Might Happen Sooner. Global economic 3 mth 18.8 9.7
recovery leading to rise in crude oil demand may materialize sooner-than- 6 mth 0.0 9.8
expected. As such, this may precipitate a recovery in O&G capex spend. In 12 mth (35.5) 3.3
turn, Uzma’s orderbook replenishment may accelerate, and delayed projects
would be reactivated. Additionally, new project awards from secured
Petronas umbrella contracts may spur margin and earnings recovery.
Recommendation
We have a Sell recommendation on Uzma with target price (TP) of RM0.61
based on 9x CY21 P/E.
Source: Bloomberg
Page 20 of 24
21-Dec-20
Earnings Summary
FYE Jun 30 (RM mn) 2019 2020 2021F 2022F 2023F FYE Jun 30 (RM mn) 2019 2020 2021F 2022F 2023F
Revenue 443.4 558.1 404.0 493.2 510.4 PPE 532.6 527.3 527.6 538.2 552.7
EBITDA 92.6 93.8 90.9 99.2 104.7 Associates & JV 10.8 11.9 18.2 25.3 33.2
D&A (40.1) (48.4) (49.7) (44.4) (45.5) Dev. Expenditure 0.0 0.0 0.0 0.0 0.0
EI 13.7 (23.5) 0.0 0.0 0.0 Others 211.3 202.1 202.1 202.1 202.1
Net Finance Costs (28.4) (29.0) (23.3) (22.6) (22.4) Non-current Assets 754.7 741.3 747.9 765.6 788.0
Associates & JV 5.2 1.2 6.3 7.1 7.9
Pretax Profit 42.9 (5.9) 24.2 39.3 44.7 Inventories 30.7 39.4 28.5 34.8 36.1
Taxation (7.7) (10.3) (4.8) (7.9) (8.9) Trade & Other Rec. 328.9 366.9 302.6 336.5 343.6
MI (5.5) (7.4) (3.8) (3.9) (4.1) Cash and bank balances 24.5 57.9 63.4 51.6 51.4
Reported Net Profit 29.7 (23.6) 15.6 27.5 31.7 Others 49.0 99.6 124.5 124.5 124.5
Core Net Profit 16.0 (0.1) 15.6 27.5 31.7 Current Assets 433.0 563.9 519.1 547.5 555.6
Core EPS (sen) 5.0 (0.0) 4.9 8.6 9.9
DPS (sen) 0.0 0.0 0.0 0.0 0.0 LT Borrowings 421.0 410.7 386.2 379.5 372.8
Book Value (RM) 1.5 1.4 1.4 1.5 1.6 Others 12.4 19.3 19.3 19.3 19.3
Net Tang Asset (RM) 1.6 1.4 1.4 1.5 1.6 Non-current Liabilities 433.4 430.0 405.5 398.8 392.1
FCF (RM) 57.9 66.8 0.0 15.2 11.4
Trade & Other Payables 113.3 221.8 179.2 203.9 208.7
Ratios ST borrowings 84.8 180.6 190.0 186.7 183.4
FYE Jun 30 (RM mn) 2019 2020 2021F 2022F 2023F Others 22.9 0.7 0.7 0.7 0.7
Valuation Current Liabilities 221.0 403.1 370.0 391.4 392.8
Core PER (x) 11.9 (2,139.5) 12.2 6.9 6.0
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 Share cap 290.1 290.1 290.1 290.1 290.1
EV/EBITDA (x) 7.4 7.1 7.2 6.6 6.2 Retained profits 206.7 150.9 166.5 194.0 225.6
P/BV (x) 0.4 0.4 0.4 0.4 0.4 Others (18.3) (2.1) (2.1) (2.1) (2.1)
P/NTA (x) 0.4 0.4 0.4 0.4 0.4 MI 54.8 33.1 36.9 40.9 45.0
FCF Yield (%) 97.4 112.3 0.0 25.6 19.1 Total Equity 533.3 472.1 491.4 522.8 558.6
Profitability ratios Total E&L 1,187.7 1,305.2 1,266.9 1,313.0 1,343.6

EBITDA margin (%) 20.9 16.8 22.5 20.1 20.5
PBT margin (%) 9.7 (1.1) 6.0 8.0 8.8 Cash Flow Statement
Core Net margin (%) 3.6 (0.0) 3.9 5.6 6.2 FYE Jun 30 (RM mn) 2019 2020 2021F 2022F 2023F
Core ROE (%) 3.3 (0.0) 3.4 5.7 6.2 Pretax profit 42.9 (5.9) 24.2 39.3 44.7
Core ROA (%) 1.3 (0.0) 1.2 2.1 2.4 Depreciation 40.1 48.4 49.7 44.4 45.5
Net interest 28.4 29.0 23.3 22.6 22.4
Liquidity ratios Associates & JV (5.2) (1.2) (6.3) (7.1) (7.9)
Current ratio (x) 2.0 1.4 1.4 1.4 1.4 Changes in WC (73.8) 85.4 32.6 (15.5) (3.5)
Quick ratio (x) 1.8 1.3 1.3 1.3 1.3 Tax (7.7) (10.3) (4.8) (7.9) (8.9)
Others (42.9) 21.2 0.0 0.0 0.0
Leverage ratios Operational cash flow (18.1) 166.5 118.7 75.8 92.2
Total Debt/ Assets (x) 0.4 0.5 0.5 0.4 0.4
Total Debt/Equity (x) 0.9 1.3 1.2 1.1 1.0 Capex (50.4) (66.2) (50.0) (55.0) (60.0)
Net (cash)debt/ Equity (x) 1.0 1.2 1.1 1.1 1.0 Interest income 0.7 2.4 3.4 3.6 3.3
Interest coverage (x) 1.8 1.4 1.5 2.1 2.3 Others 14.7 (111.1) 0.0 0.0 0.0
Investing cash flow (35.0) (174.9) (46.6) (51.4) (56.7)
Growth ratios
Revenue (%) n.a. 25.8 (27.6) 22.1 3.5 Issue of Share Cap 0.0 0.0 0.0 0.0 0.0
EBITDA (%) n.a. 1.3 (3.0) 9.1 5.6 Interest expense (29.1) (31.4) (26.7) (26.1) (25.7)
PBT (%) n.a. (113.7) (510.3) 62.2 13.9 Net change in debt 85.8 42.9 (15.0) (10.0) (10.0)
Core net profit (%) n.a. (100.6) (17,602.9) 76.3 15.3 Others 26.9 1.1 0.0 0.0 0.0
Core EPS (%) n.a. (100.6) (17,602.9) 76.3 15.3 Financial cash flow 83.5 12.6 (41.7) (36.1) (35.7)
Key Assumptions Net cash flow 30.4 4.2 30.4 (11.8) (0.2)
DCR WIF D18 (RM K) 190 190 180 190 Beginning Cash 9.8 23.2 33.0 63.4 51.6
Orderbook Replenishment (RM mn) 450 200 200 0 Forex & others (21.5) 5.7 0.0 0.0 0.0
HWU Average Utilisation (%) 60 30 33 35 Ending Cash 18.7 33.0 63.4 51.6 51.4
HWU Revenue (RM 'K/month) 808 816 824 832
Page 21 of 24
21-Dec-20
Velesto Energy Bhd TP: RM0.16 (+10.3%)

Last Traded: RM0.15
Early Beneficiary of Capex Rebound HOLD
1. Weak Fleet Utilisation. 4Q20F drilling fleet utilization is expected to Bloomberg Code VEB MK
plummet to an estimated 50%. These is the lowest quarterly level Stock Code 5243
experienced by VEB since 1Q17 (26%) during the 2015-17 oil price Listing Main Market
downcycle. Beyond 4Q20, at this juncture, only two (NAGA 4 and 8) out of Share Cap (mn) 8,216
7 rigs have secured contracts. Therefore, a largely idled fleet may prelude Market Cap (RMmn) 1,232.3
earnings loss for VEB. This is reflected in VEB’s depleted orderbook of 52-wk Hi/Lo (RM) 0.41/0.09
RM450mn (options: RM200mn) which translates to less than one year of 12-mth Avg Daily Vol ('000 shrs) 70,648
earnings visibility. Moreover, current tenders by VEB are heavily skewed Estimated Free Float (%) 38.9
towards short term contracts. Out of a total of 26 bids, only 5 contracts Beta 2.2
have long term tenures. On top of that, any new contracts from Petronas Major Shareholders (%) PNB - 49.2
may only commence in April following end of monsoon season. As such, Urusharta Jemaah - 5.0
VEB’s near-term earnings risk in 1H21 is heightened. EPF- 4.8
2. Early Beneficiary of Oil Price Recovery. Drilling rig players are amongst Forecast Revision (%)
the first to benefit from oil price recovery. This is because the latter would FY20 FY21
catalyse immediate acceleration of drilling activity at both producing fields Forecast Revision (%) 0.0 0.0
and new exploration wells. Thus, oil companies would be able to ramp up Core Net Profit (RMmn) (32.8) (17.6)
production swiftly to capitalize on higher prices and also kick-start Consensus (25.7) (40.2)
development of greenfields. Lead time for mobilization of Velesto’s rigs
TA/Consensus (%) 128.0 43.8
within Malaysian waters only takes a brief turnaround time of circa 1-2
Previous Rating Sell (Upgrade)
months. Therefore, in comparison with other O&G contractors down the
value chain, earnings recovery for VEB will be amongst the earliest to
materialize. Additionally, higher demand for VEB’s rigs may potentially
FY20 FY21
translate to higher Daily Charter Rates (DCR) that will boost margins.
Net (Debt)/Equity (x) 0.5 0.4
3. Cost Cutting Props Bottomline. VEB’s effective cost cutting measures
ROA (%) (0.8) (0.5)
have resulted in multi-year savings over 2016-19 (2016-18 Average:
ROE (%) (1.8) (1.0)
RM25.1mn, 2019: RM25.1mn). This is on the back of savings emanating from:
(1) Procurement, (2) Repair and maintenance, (3) Idle rig management (4)
P/NTA (x) 0.4 0.4
Personnel costs, and (5) Early loan repayment. In spite of having harvested
long hanging cost fruits in 2016-19, VEB managed to squeeze in further
savings of RM14mn for 9M20 (target: RM20mn). VEB’s lean cost base enables Share Performance
revenues from higher fleet utilization and DCRs to largely flow direct to Price Change (%) VEB FBMKLCI
bottomline. 1 mth 11.5 3.0
3 mth 7.4 9.7
Risks 6 mth (6.5) 9.8
Room for DCR Downside. Given the weak jackup drilling market, we do 12 mth (61.8) 3.3
not discount the possibility of Petronas requesting for DCR discounts.
Moreover, DCRs have been hovering at USD70K-72K since 2Q19 – which (12-Mth) Share Price relative to the FBMKLCI
implies room for further cuts.
Recommendation
Given the drivers above (i.e. early beneficiary to O&G capex rebound, effective
cost cutting, earnings weakness well flagged to market), we upgrade VEB’s
valuation to 9x CY21 EV/EBITDA (previous: 8.5x). This valuation is in-line with
VEB’s regional peers that have recently re-rated. Correspondingly, our target
price is raised to RM0.16 (previous: RM0.14) and we upgrade VEB to Hold
(previous: Sell). Source: Bloomberg
Page 22 of 24
21-Dec-20
Earnings Summary
Income Statememt Balance Sheet
Revenue 573.8 670.8 547.8 577.1 657.3 Property, Plant & Equip 3,530.4 3,410.2 3,285.6 3,180.1 3,093.8
EBITDA 258.5 312.8 236.9 229.9 266.0 Associates 2.2 2.0 2.2 2.5 2.8
Depreciation (191.5) (198.4) (217.2) (203.0) (197.5) Deposits in bank 0.0 0.0 0.0 0.0 0.0
Net finance cost (72.7) (73.4) (59.8) (50.5) (49.1) Others 2.1 13.3 13.3 13.3 13.3
Share of Associates 0.2 0.2 0.2 0.3 0.3 Non-Current Assets 3,534.8 3,425.4 3,301.1 3,195.9 3,109.8
Exceptionals (12.2) 1.2 9.9 0.0 0.0
Pretax Profit (17.6) 42.5 (29.9) (23.3) 19.7 Inventories 179.5 187.4 141.8 149.3 170.1
Taxation (2.9) (9.4) 6.9 5.6 (4.9) Trade and other rcvb 234.2 281.5 212.9 224.2 255.4
MI (0.9) (0.1) 0.1 0.1 (0.1) Cash and Deposits 235.0 240.0 276.7 200.0 112.1
Net Profit (21.3) 32.9 (22.9) (17.6) 14.7 Others 179.9 139.4 139.4 139.4 139.4
Core Net Profit (9.2) 31.7 (32.8) (17.6) 14.7 Current Assets 828.7 848.3 770.7 713.0 677.0
Adj. Core EPS (sen) (0.1) 0.4 (0.4) (0.2) 0.2
DPS (sen) 0.0 0.0 0.0 0.0 0.0 LT Borrowings 1,348.4 981.0 867.2 753.4 639.6
Book Value (RM) 0.3 0.3 0.3 0.3 0.3 Due to Holding Co. 0.0 8.1 8.1 8.1 8.1
NTA (RM) 0.3 0.3 0.3 0.3 0.3 Others 0.0 0.0 0.0 0.0 0.0
Non-Current Liabilities 1,348.4 989.1 875.3 761.5 647.7
Ratios
FYE 31 Dec (RMmn) 2018 2019 2020E 2021F 2022F ST Borrowings 88.8 312.3 276.1 239.8 203.6
Valuations Trade & other Payables 89.3 118.5 89.6 94.4 107.5
Core PER (x) n.a. >100 n.a. n.a. 83.9 Due to Holding Co. 0.0 0.0 0.0 0.0 0.0
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 Others 38.4 50.5 50.5 50.5 50.5
EV/EBITDA (x) 9.4 7.3 8.9 8.8 7.4 Current Liabilities 216.6 481.3 416.2 384.7 361.6
P/BV (x) 0.4 0.4 0.4 0.4 0.4
P/NTA (x) 0.4 0.4 0.4 0.4 0.4 Total Liabilities 1,564.9 1,470.3 1,291.4 1,146.2 1,009.4
FCF Yield (%) 110.3 (187.6) 4.4 11.4 14.3
Share Capital 4,054.8 4,054.8 1,844.8 1,844.8 1,844.8
Profitability ratios Reserves (1,257.8) (1,252.7) 934.4 916.8 931.5
EBITDA margin (%) 45.0 46.6 43.2 39.8 40.5 Minority Interests 1.5 1.3 1.1 1.1 1.1
PBT margin (%) (3.1) 6.3 (5.5) (4.0) 3.0 Equity 2,798.5 2,803.4 2,780.4 2,762.7 2,777.4
Core Net margin (%) (1.6) 4.7 (6.0) (3.0) 2.2
Core ROE (%) (0.2) 0.8 (1.8) (1.0) 0.8 Total E&L 4,363.4 4,273.7 4,071.8 3,908.9 3,786.8
Core ROA (%) (0.2) 0.7 (0.8) (0.5) 0.4
Cash Flow Statement
Liquidity ratios FYE 31 Dec (RMmn) 2018 2019 2020E 2021F 2022F
Current ratio (x) 3.8 1.8 1.9 1.9 1.9 Pretax Profit (17.6) 42.5 (29.9) (23.3) 19.7
Quick ratio (x) 3.0 1.4 1.5 1.5 1.4 Depreciation 191.5 198.4 217.2 203.0 197.5
Net Interest 72.7 73.4 59.8 50.5 49.1
Leverage ratios Associates & JCEs (0.2) (0.2) (0.2) (0.3) (0.3)
Total Debt/ Assets (x) 0.3 0.3 0.3 0.3 0.2 Working Cap Changes (31.6) (26.0) 85.4 (14.2) (38.8)
Total Debt/Equity (x) 0.5 0.5 0.4 0.4 0.3 Income Tax Paid (2.9) (9.4) 6.9 5.6 (4.9)
Net Debt(Cash)/ Equity (x) 0.3 0.3 0.5 0.4 0.4 Others (54.2) (76.0) 0.0 0.0 0.0
Interest Coverage (x) 0.8 1.4 0.3 0.5 1.2 CF from Operations 157.6 202.7 339.1 221.3 222.2
Growth ratios Capex (27.6) (113.4) (92.6) (97.5) (111.1)

Revenue (%) (2.2) 16.9 (18.3) 5.3 13.9 Acquisitions/Disposal 0.0 0.0 0.0 0.0 0.0
EBITDA (%) 12.1 21.0 (24.3) (2.9) 15.7 Interest Received 13.8 8.0 7.2 8.3 6.0
PBT (%) (98.4) >-100 (170.4) (22.2) (184.6) Others (158.6) 50.7 0.0 0.0 0.0
Core Net Profit (%) (93.7) >-100 (203.7) (46.4) (183.5) CF from Investing (172.4) (54.7) (85.4) (89.2) (105.1)
Core EPS (%) (97.8) >-100 (203.9) (46.4) (183.5)
Dividends 0.0 0.0 0.0 0.0 0.0
Key Assumptions Net Change in Debt (451.3) (137.9) (150.0) (150.0) (150.0)
Average Rig Fleet DCR (USD 'k) 69.0 70.0 66.8 68.7 74.2 Interest Expense (85.1) (81.5) (67.0) (58.8) (55.1)
Average Rig Fleet Utilisation (%) 73.0 80.0 70.2 71.4 75.0 Others 67.4 57.3 0.0 0.0 0.0
HWU Average Utilisation (%) 10.0 19.0 50.0 70.0 80.0 CF from Financing (469.0) (162.0) (217.0) (208.8) (205.1)
HWU Revenue per Day (RM 'K/day) 50.0 52.5 55.1
Net Cash Flow (483.9) (14.0) 36.7 (76.6) (88.0)
Beginning Cash 669.9 259.1 240.0 276.7 200.0
Exchange Rates 1.4 (5.1) 0.0 0.0 0.0
Ending Cash 187.4 240.0 276.7 200.0 112.1
Page 23 of 24
21-Dec-20
(TH I S P A GE IS IN TE N TI ON AL L Y L E F T B L AN K )
Sector Recommendation Guideline

OVERWEIGHT: The industry, as per our coverage universe, is expected to outperform the FBMKLCI over the next 12 months.
NEUTRAL: The industry, as per our coverage universe, is expected to perform in line with the FBMKLCI over the next 12 months.
UNDERWEIGHT: The industry, as per our coverage universe, is expected to underperform the FBMKLCI over the next 12 months.
Stock Recommendation Guideline

BUY : Total return within the next 12 months exceeds required rate of return by 5%-point.
HOLD : Total return within the next 12 months exceeds required rate of return by between 0-5%-point.
SELL : Total return is lower than the required rate of return.
Not Rated: The company is not under coverage. The report is for information only.
Total Return is defined as expected share price appreciation plus gross dividend over the next 12 months. Gross dividend is excluded from total return
if dividend discount model valuation is used to avoid double counting.
Required Rate of Return of 7% is defined as the yield for one-year Malaysian government treasury plus assumed equity risk premium.
Disclaimer
The information in this report has been obtained from sources believed to be reliable. Its accuracy and/ or completeness is not guaranteed and opinions are subject to change without
notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document.
We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein.
As of Monday, December 21, 2020, the analyst, Kylie Chan Sze Zan and Abel Goon, who prepared this report, have interest in the following securities covered in this report:
(a) nil
Kaladher Govindan – Head of Research
TA SECURITIES HOLDINGS BERHAD (14948-M)

A Participating Organisation of Bursa Malaysia Securities Berhad
Menara TA One 22 Jalan P. Ramlee 50250 Kuala Lumpur Malaysia Tel: 603 – 2072 1277 Fax: 603 – 2032 5048
www.ta.com.my
Page 24 of 24

Oil & Gas Sector: Overweight

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Oil & Gas Sector: Overweight

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SECTOR UPDATE

Monday, December 21, 2020

THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY*

Oil & Gas Sector Overweight

Whilst near-term supply-demand fundamentals remain weak, oil price downside is

Figure 1: Brent Crude Oil Price Figure 2: Global Oil Demand

Global Demand (mn bod)

Figure 3: Global Crude Oil Supply-Demand Figure 4: Global Economic Growth

Excess Supply/ (Shortfall) mn bpd

GDP Growth (%)

Source: EIA, TA Securities Source: IMF, TA Securities

Figure 5: Capex Spend by Major Oil Companies

2020E Previous Guide 2019

Source: Companies, TA Securities

Figure 6: Petronas Capex Spend Figure 7: Petronas Dividends

Dividends (RM bn)

Source: Petronas, TA Research Source: Petronas, TA Research

Fundamentals May Catch Up Sooner-than-Expected. Whilst near-term supply-demand

Figure 8: OECD Inventories Figure 9: Change in Global Oil Demand

3250 value 3-year MA 3000

Change in Oil Demand (mn bpd)

China US Japan India Others

Source: EIA, TA Research Source: EIA, TA Research

OPEC US Russia Brazil Canada 34

Source: EIA, TA Research Source: OPEC, TA Research

100 Jackup Tender Semi-sub 65

China Manufacturing PMI US Manufacturing PMI

Source: Bloomberg, TA Research Source: Bloomberg, TA Research

Appendix 1: OPEC+ Conference Outcome

Lotte Chemicals Titan Holding Bhd TP: RM3.58 (+22.6%)

Investment Themes Share Information

Per Share Data Borrowings 0.0 0.0 180.0 0.0 0.0

MISC Bhd TP: RM8.90 (+38.4%)

Investment Themes Share Information

Ratios Borrowings 5,778.5 5,599.5 5,539.5 5,479.5 5,419.5

Malaysia Marine Heavy Engineering TP: RM0.50 (+9.9%)

Investment Themes Share Information

Risks 12 mth (45.9) 3.3

Pantech Group Holdings Bhd TP: RM0.29 (-28.4%)

Profitability ratios Total E&L 891.5 911.7 928.1 967.1 1,002.3

Petronas Chemicals Group Bhd TP: RM9.10 (+20.1%)

Risks Share Performance

Serba Dinamik Holdings Bhd TP: RM2.10 (+21.4%)

Investment Themes Share Information

1. Orderbook Traction Unperturbed by Downcycles. Serba’s current Bloomberg Code SDH MK

Uzma Bhd TP: RM0.61 (+1.7%)

Investment Themes Share Information

Risks 1 mth 25.0 3.0

Profitability ratios Total E&L 1,187.7 1,305.2 1,266.9 1,313.0 1,343.6

Velesto Energy Bhd TP: RM0.16 (+10.3%)

Investment Themes Share Information

Growth ratios Capex (27.6) (113.4) (92.6) (97.5) (111.1)

Sector Recommendation Guideline

Stock Recommendation Guideline

Kaladher Govindan – Head of Research

TA SECURITIES HOLDINGS BERHAD (14948-M)

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