Petronas’ core earnings up on higher product prices

Oil & Gas Sector  NEUTRAL

Petronas’ core earnings up on higher product prices

Petroliam Nasional’s (Petronas) 2QFY16 core net profit rose 45% QoQ to RM9bil, excluding one-off asset impairments, largely due to higher average realised product prices with the 34% QoQ increase in average Brent prices to US$45/barrel. Hence, the group’s EBITDA rose by 14% while operating cashflow surged by 64%. This was partly offset by a 5% appreciation in the ringgit and 5% decline in production output. Including the RM9bil asset impairments, which was provided due to the group’s weak oil price outlook, Petronas’ 2QFY16 net profit instead fell 87% QoQ to RM348mil.

The group’s 2Q16 capital expenditure rose 24% QoQ to RM14bil due higher spending on downstream projects. Nevertheless, the capex trajectory is still southwards as Petronas’ 1HFY16 spending fell 21% to RM25bil. Recall that Petronas had earlier proposed a capex programme of RM350bil for 2016-2020 late last year. However, following the decline of crude oil prices towards the US$30/barrel threshold in February this year, Petronas president and group chief executive officer Datuk Wan Zulkiflee Wan Ariffin announced a reduction in capex and operational expenditure (opex) for 2016 by between RM15bil and RM20bil, which is part of the group’s plans to reduce capex and opex by RM50bil over the next four years.

Crude oil prices have since rebounded to US$48/barrel on speculation that informal discussions among OPEC members next month may lead to some price stabilisation actions together with a tenuous cease-fire with Nigerian militants. However, Petronas’s CEO and president Datuk Wan Zulkifli Wan Ariffin affirmed that Petronas maintains its crude oil price outlook at US$30/barrel for 2016 and US$40/barrel for 2017. Hence, we do not expect any significant change in the group’s strategic direction towards rationalisation of upstream exploration and development expenditures.

While upstream developments still face significant headwinds, we expect downstream activities, which benefit from low crude oil prices, to be less affected. Our Neutral call on the sector is maintained as prospects for a sustainable turnaround in crude oil prices are opaque at this stage with the potential resurgence of shale oil output if crude prices remain above the US$40/barrel threshold for a sustained period. We prefer companies with stable and recurring earnings such as Dialog Group and Yinson. Our HOLD calls are for Petronas Gas, MISC and UMW Oil & Gas while Bumi Armada remains a SELL.   

STAR Media Group  HOLD (U.R)

2QFY16: Disappointing quarter

We place our fair value and numbers under review pending further clarification by management in the analysts’ briefing this Thursday.

Star’s 1HFY16 core net profit came in markedly below expectations at RM38.3mil (-38% YoY), accounting for only 29% of our and 35% of consensus full-year estimates. This is after stripping out, among other items, a one-off gain on deregistration of a subsidiary which amounted to RM21mil. As guidance, 1H profits ranged between 38% and 52% of full-year estimates from FY10-FY15.

The poor performance can be mainly attributed to the underperformance in the print segment, which registered a 42% YoY decline in its 1HFY16 profit before tax on the back of a 13% revenue contraction from RM327mil to RM285mil.

During the quarter, newspaper adex fell by 11.9% YoY, notwithstanding a recovery in both the MIER Consumer Sentiment and Business Conditions Indices.

In addition, the radio broadcasting segment also took a hammering against the backdrop of a softer consumer market, which saw the segment’s revenue decline by 13% YoY and its earnings dive into a loss before tax of RM2.3mil in 1HFY16 vs. a PBT of RM0.2mil in 1HFY15.

Moving forward, we remain cautious on the adex outlook in the near term, pending clarification by management on any changes to the company's market share.

On a brighter note, Star’s event, exhibition, interior and thematic segment continued to bear fruit thanks to exhibitions and intellectual property rights held by Cityneon. YoY, the segment recovered to a profit before tax of RM18.3mil as compared to a loss before tax of RM0.1mil in the preceding period (1HFY15).

Acquisition of Victory Hill Exhibitions Pte Ltd is expected to wean Star’s revenue source off adex and enhance its near term performance through exhibitions for AVENGERS STATION and TRANSFORMERS.

The company declared a single tier, interim dividend of 9.0 sen per ordinary share during the quarter (vs. 1HFY15: 9.0 sen).

Star currently trades at 17.0x FY16F PER, which is over 2sd higher than its 5-year historical average PER. MCIL and Media Prima are trading at a 1-year fwd PER of 11.0x and 13.3x respectively