Brokers' take: UOBKH downgrades Malaysia's oil, gas sector to 'market weight'

UOB Kay Hian (UOBKH) on Wednesday (Mar 2) downgraded Malaysia's oil and gas sector to "market weight" following a recent rerating on oil price sentiment and uncertain earnings outlook.

The downgrade comes after UOBKH downgraded its stock calls on offshore and oil plays like Malaysia Marine and Heavy Engineering (MMHE), Dialog Group and Uzma following weak results.

Malaysia's state energy firm Petronas has also said it would remain conservative and would not immediately negotiate service rates despite current high oil prices. Reasons for conservatism include the continued under-delivery of certain projects and volumes; as well as the risk of additional dividends, assuming the nation's subsidy Bill exceeds expectations.

Petronas on Tuesday posted a fourth-quarter profit of RM13.4 billion (S$4.3 billion), compared with a loss of RM1.1 billion in the same period a year ago.

UOBKH believes sector valuations have rerated ahead on oil price sentiment since its upgrade in January 2022 that was premised on a higher maintenance activity outlook.

"While oil price may remain volatile (on upcoming interest rate cycle, Iran nuclear deal and Opec+ decision), prices may likely hover above Petronas' assumption," the research team said.

Among large caps, Yinson Holdings is a top pick for UOBKH with a "buy" call and target price of RM7.60. The research team noted that Yinson's price appears to be a bargain relative to the sector and oil price sentiment due to its rights issue exercise expected to complete in mid-2022. The market has also yet to fully price in Yinson's floating production storage and offloading contract wins.

Shares of Yinson were trading 1.2 per cent or RM0.06 lower at RM5.05 as at 11.35 am on Wednesday.