Comprehensive Analysis of Malaysia’s Oil & Gas Sector and Key Stock Picks

Date: 10 February 2025

Broker: UOB Kay Hian

Sector Overview: Oil & Gas in Malaysia

The Malaysian Oil & Gas (O&G) sector is facing a transformative period, with Petronas implementing a significant right-sizing exercise amidst a backdrop of global energy transition and geopolitical challenges. Despite these changes, the sector remains resilient, with opportunities for investors to capitalize on undervalued stocks, especially maintenance-centric players.

Key Sector Highlights

• Petronas is reviewing 30% of its staff, targeting administrative roles to streamline operations.
• The Shell MDS injunction is adding uncertainties, challenging existing agreements and operational stability.
• Petronas aims to sustain local O&G production at 2 million barrels of oil equivalent per day (boepd) despite planned shutdowns.
• The sector’s valuation has corrected by 30% due to the Petronas-Petros saga, presenting value opportunities for investors.

Company Deep Dive Analysis

Bumi Armada (BAB MK) – HOLD

• Share Price: RM0.66
• Target Price: RM0.65
• Market Cap: RM3,912 million
• Valuation: Price-to-Earnings (PE) ratio of 4.9x for 2024F and 3.8x for 2025F.
• Insights: Bumi Armada offers an attractive valuation with a low PE, but its growth potential remains constrained by its high net debt-to-equity ratio of 36%. The company’s focus on floating production storage and offloading (FPSO) operations provides stable earnings, but structural headwinds limit upside potential.
• Recommendation: Hold, as the stock offers limited upside despite its favorable valuation metrics.

Dialog Group (DLG MK) – BUY

• Share Price: RM1.89
• Target Price: RM3.00
• Market Cap: RM10,671 million
• Valuation: PE ratio of 20.4x for 2024F and 18.7x for 2025F.
• Insights: Dialog Group stands out for its diversified business model and its dominance in crude storage and energy security. Additionally, its exposure to Johor/Pengerang positions it well to benefit from increased demand for storage facilities. The company also shows strong execution capabilities and a robust balance sheet.
• Recommendation: Buy, as it is well-positioned for earnings recovery and long-term growth.

Deleum (DLUM MK) – BUY

• Share Price: RM1.37
• Target Price: RM1.70
• Market Cap: RM550 million
• Valuation: PE ratio of 8.7x for 2024F and 8.2x for 2025F.
• Insights: Deleum specializes in gas turbine maintenance, a critical segment as Malaysia focuses on sustaining gas production. Its lean operations and niche expertise make it a compelling pick for investors seeking exposure to the maintenance space.
• Recommendation: Buy, given its strong position in a niche market and favorable valuation.

Yinson Holdings (YNS MK) – BUY

• Share Price: RM2.37
• Target Price: RM3.75
• Market Cap: RM7,298 million
• Valuation: PE ratio of 13.6x for 2024F and 10.7x for 2025F.
• Insights: Yinson is a market leader in the FPSO space with a global value chain that is not reliant on Petronas. Its strong execution capabilities and diversified revenue streams make it a top pick in the sector. The company also benefits from long-term contracts that provide earnings visibility.
• Recommendation: Buy, as it offers a compelling growth story and strong fundamentals.

MISC (MISC MK) – BUY

• Share Price: RM7.20
• Target Price: RM9.55
• Market Cap: RM32,139 million
• Valuation: PE ratio of 13.9x for 2024F and 13.6x for 2025F.
• Insights: MISC is a heavyweight in the shipping and logistics segment, with a focus on LNG transportation. It enjoys stable earnings from long-term charter contracts. However, its growth potential is moderated by geopolitical challenges and rising competition in the LNG space.
• Recommendation: Buy, as it provides steady income and remains a key player in the LNG segment.

Uzma (UZMA MK) – BUY

• Share Price: RM0.73
• Target Price: RM1.08
• Market Cap: RM322 million
• Valuation: PE ratio of 7.3x for 2024F and 6.2x for 2025F.
• Insights: Uzma is a niche O&G player focusing on well services and enhanced oil recovery (EOR). It has a strong balance sheet and is well-positioned to benefit from maintenance backlogs and Petronas’ continued production targets.
• Recommendation: Buy, as it offers significant growth potential at an attractive valuation.

Velesto Energy (VEB MK) – HOLD

• Share Price: RM0.19
• Target Price: RM0.17
• Market Cap: RM1,520 million
• Valuation: PE ratio of 33.0x for 2024F and 11.7x for 2025F.
• Insights: Velesto Energy focuses on upstream drilling services. While its valuation is stretched, the company’s earnings may recover in 2025 as demand for drilling rigs picks up. However, its high debt levels and inconsistent earnings remain a concern.
• Recommendation: Hold, as the stock lacks short-term catalysts and faces significant risks.

Sapura Energy (SAPE MK) – BUY

• Share Price: RM0.04
• Target Price: RM0.07
• Market Cap: RM643 million
• Valuation: Negative PE due to ongoing losses.
• Insights: Sapura Energy remains a high-risk, high-reward play. The company’s financial struggles and negative earnings weigh on sentiment, but its restructuring efforts and new contracts could provide a turnaround opportunity.
• Recommendation: Buy, for speculative investors willing to accept high risks.

Conclusion

The Malaysian Oil & Gas sector presents a mix of opportunities and challenges as it navigates structural changes and geopolitical uncertainties. Investors are advised to focus on quality players with proven execution capabilities, such as Dialog Group, Yinson Holdings, and MISC. While some stocks like Bumi Armada and Velesto Energy offer limited upside, others like Sapura Energy and Uzma provide high-growth potential for risk-tolerant investors. With Petronas’ long-term production targets and the sector’s valuation correction, this is an opportune time to reassess portfolios and capitalize on undervalued gems.