Dialog, which operates as a technical service provider in the oil, gas (O&G) and petrochemical sectors, was upgraded to "buy" from "neutral" as its recent share price weakness offers an opportunity to accumulate the stock. The stock's target price (TP) was maintained at RM4.
“Although the firm may not be able to achieve growth in FY21 (the financial year ending June 30, 2021) as there are no signs of retracement in tank terminal rates, Dialog deserves a premium valuation as its growth trajectory is expected to return in FY22,” noted RHB Research analyst Sean Lim.
He explained that while downstream activities would recover gradually from the first quarter ended Sept 30, 2020 (1QFY21), on a full-year basis they would still record a decline.
"Management guided for joint venture (JV) and associate contributions to grow 10% year-on-year (y-o-y) in FY21. Further growth may be seen in FY22, with commercialisation of the 430,000 cbm Phase 3A capacity expansion
dedicated for BP by mid-2021," he said.
“It may also take longer than expected to seal the new additional tank terminal capacity expansion for Pengerang's Phase 3 as most clients are spending cautiously at present”, said Lim.
Lim also pointed out that Dialog’s Pengerang Independent Terminals Sdn Bhd (PITSB) had been operating at optimal capacity despite the recent spike in oil prices. Meanwhile, rates were hovering above USS$6 to USS$7 per cubic metre (cbm).
"Based on our crude oil price forecasts of US$51-US$55/bbl for 2021-2022, there is a possibility of onshore storage prices softening slightly from peak rates, but this could be sustained at USS$5.50 per cbm. Recall that the average contract tenure for PITSB is about 12 months," he noted.
MISC, which provides international energy-related maritime solutions and services, had its "buy" call maintained but its TP lowered to RM8.11 from RM8.53, in tandem with reduced valuation of its petroleum segment to 1.1 times price-to-book value from 1.3 times prior.
"We believe the recent share price weakness has factored in the sluggish tanker market and this could be an accumulation opportunity to position for a rate recovery in 2021. Post earnings adjustment, we still expect
its operating cash flow to grow 9% to 10% in the next two years, anchored by new asset additions. [Its] dividend yield is still decent and any special dividend will be a positive surprise," said Lim in a separate research note.
He believes that recovery will be gradual as OPEC+ slowly increases production of oil with a monthly cap of 500,000 barrels per day, depending on market conditions, but is optimistic that an economic recovery will happen in the second half of the year (2H21), thanks to positive vaccine developments.
"Thus, we should see spot charter rates improve from current levels, benefiting from improving tanker demand, coupled with persistence of low slow fleet growth as evident from its multi-year low order book level. A higher term-to-spot ratio of 65:35 in 3Q20 (from 76:24 in 2Q20) is likely to increase its exposure to weak spot rates in 4Q20," he said.
Lim noted that MISC had also recently taken possession of two Dynamic Positioning Shuttle Tankers and the first of its Very Large Ethane Carriers, and is expected to take possession of more ships over the next two years. "Most of these vessels have long-term contracts and will then gradually strengthen its recurring cash flow," he said.
Bumi Armada, which is an international offshore oilfield services provider, also had its "buy" call maintained with a new TP of 43 sen from 38 sen earlier.
"We continue to like Bumi Armada for its improved earnings and cash flow visibility, underpinned by stable FPSO (floating production storage and offloading) contributions masking weaker offshore marine services (OMS) weakness. Its risk-reward profile looks attractive as the current 5.2 times FY21 (the financial year ending Dec 31, 2021) price-to-earnings and 0.5 times FY20 price-to-book value (-1.5 standard deviations to its three-year mean) reflects an elevated 2.6 times net gearing as at 3Q20," said Lim in another statement.
Its TP, meanwhile, was raised after narrowing the discounted cash flow of the Armada Kraken FPSO to 10% from 20% earlier, due to better vessel stability. He noted that its FPSO earnings could have risen on a quarterly basis in 4QFY20 on higher contributions from Armada Kraken after its scheduled maintenance was completed in September.
"Our new TP implies 6.4 times FY21F (forecasted) price-earnings ratio and 0.6 times FY21 forward price-to-book value. Our base-case assumption is that Bumi Armada will refinance the borrowings due in May, so no equity fundraising would be required," he said, referring to RM656 million in short-term debt due that month.
Lim said while the OMS segment is expected to still face headwinds in 4Q20 — in the absence of subsea work orders and potentially lower offshore service vessel (OSV) utilisation rates due to the monsoon season — he believes that OSV contributions could improve in 2021. "This may stem from higher vessel demand on drilling and related projects, while Bumi Armada pushes for better spot charter rates."
Magnum, which operates as a gaming or numbers forecasting lottery business, was maintained at "buy" with a higher discounted cash flow-derived TP of RM2.97 from RM2.73.
“This was due to the tax review finally being concluded after the final settlement of the tax and penalty payment was agreed with the Inland Revenue Board (IRB) for an amount lower than expected," said analysts Loo Tungwye and Lee Meng Horng in a research note. Magnum made a settlement of tax payment with the IRB at RM80.6 million, 56% lower than the RM182.8 million initially expected.
The analysts said their projected earnings for 2020 to 2022 remained unchanged as the tax settlement was a non-recurring item, while their dividend per share estimates for 2020 to 2021 also stayed the same as they believe that Magnum's operations can generate enough cash flow to cover the settlement and maintain its regular dividend.
“Magnum remains our preferred pick as a pure-play numbers forecast operator (NFO) on account of its resilience in the 4D business that could benefit from ongoing government efforts to curb illegal gambling”, said the analysts.
They added that ticket sales had improved significantly since its outlets reopened in June, and sales were now at around 85% to 90% of pre-pandemic levels.
"Further earnings upside could come from the legislation of stricter gambling laws and potential monetisation of its stake in U-Mobile," the analysts said.
