KUALA LUMPUR (March 11): Malaysia’s upstream services firms in the oil and gas sector are expected to deliver strong earnings this year that belie their recent decline in valuations, said Kenanga Investment Bank.

The upstream services industry is still in an upcycle, with topline and margins expected to be maintained or potentially expand this year, particularly for those focusing on maintenance, the research house said and kept the oil and gas sector on an “overweight” call.

“While oil price outlook appears more tepid in 2025, we still believe that the valuation discount is unjustified, given that the sector fundamentals remain intact and the players under our coverage still possess very comfortable balance sheet,” Kenanga said.

Bursa Malaysia Energy Index, which tracks 31 stocks in the sector, have lost more than 14% since the year began, in line with the softening oil prices. Brent, the global benchmark for crude oil, have dipped nearly 8%.

Dialog Group Bhd (KL:DIALOG), the sector’s largest by market capitalisation, has declined 23% year-to-date, following an unexpected quarterly loss.

Kenanga said it is upgrading Dialog to “outperform” from “market perform” previously, noting that the sharp selldown has “overly corrected” its weak earnings from its engineering, procurement, construction and commissioning (EPCC) segment.

Dialog will also see smaller losses at the segment following recent provisions, while its valuations have fallen to 17 times its forward earnings and under the past five-year average, the house said.

“This makes the company’s risk-reward profile much more attractive at this juncture, with potential upside in the medium term,” Kenanga said.

Dayang Enterprise Holdings Bhd (KL:DAYANG) and Keyfield International Bhd (KL:KEYFIELD), however, are Kenanga’s top upstream picks. Both are expected to benefit from higher maintenance, as well as startup activities, supported by stable demand amid tightening vessel supply, it noted.

In the downstream sub-sector, the house flagged “high likelihood of upside surprises in the coming months”, driven by a potential recovery in demand, telling investors to look past the weak near-term outlook.

The petrochemical market appears to be “bottoming” with a potential global business cycle recovery in 2025, driven by easing monetary policy in China and Europe, Kenanga said in picking Petronas Chemicals Group Bhd (KL:PCHEM) as one of its top picks.

“We believe the bear case for the Pengerang Integrated Complex is already priced in, setting the stage for potential upside surprises in 2025,” the house said.