Our recent meeting with Dayang’s management affirms our cautious stance on its full-year FY21 performance. While we have seen orders coming back strongly since 4Q last year, movement restrictions and stricter operating procedures (SOPs) have limited execution progress and efficiencies however. Dayang recently reported lower-than-expected earnings in its 2QFY21 results with a core net profit of only RM6m. Gross profit margin compressed by 19ppt YTD. We foresee the level of productivity remaining low given the still-high COVID-19 infections and fatality rate, affecting the overall performance for this year. Earnings from FY22 onwards will improve however, on the back of a healthy outstanding orderbook of RM2.3bn as well as improved efficiencies given the gradual relaxation on SOPs post COVID-19 vaccinations. Maintain Outperform with an unchanged TP of RM1.35 based on 14x PER multiple over FY22 EPS.

• FY21 – a challenging year. Dayang recently reported a core net profit of only RM6m in its 2QFY21 results, though narrowing its core net loss for 1HFY21 to RM18.3m. The results came in below our and consensus estimates, however. The main culprits of the weak performance are movement restrictions and stricter SOPs implemented, resulting in gross profit margin compressing by 19ppt YTD. Considering the 2QFY21 performance, we are of the view that the overall performance for FY21 will be unexciting as efficiency levels are expected to remain low given the difficulties in project execution due to a lower manpower capacity and tight SOPs set by the Health Ministry, specifically on workers’ movement. This year, crews at offshore sites are not allowed to transfer directly to other platforms to perform other jobs, without a 14- day onshore quarantine. As a result, management guided that there will be deferment of certain work orders i.e., i-HUC worth c. RM80m to next year. In addition, performance will also be impacted by other unexpected events such as the recent total lockdown in Labuan for almost two months, and operations of five vessels also being halted for between 2 - 4 weeks due to COVID-19 infections. In addition, 4QFY21 is also expected to be weaker due to monsoon season.

• Caution on further impairment. Recent results saw an impairment loss amounting to RM27.9m (RM29m owing to Perdana). Given the current operating climate and uncertainty in project execution, management cautions on further impairments in the coming quarters though with potential write-backs at the end of the reporting period. The Group has adopted value-in-use estimations which entail discounting the estimated future cash flows of assets, taking into account the current vessels’ utilisation and charter rates. Based on orders in hand, management guided that utilisation rates for 3Q and 4Q will be c. 70% on average.

• Better year ahead. We understand that Dayang has achieved 100% vaccination rate for its workers. Hence, the on-going discussion involving Petronas, Health Ministry, and state government of Sarawak with regards to the movement restrictions (relaxation on quarantine period) is expected to bear positive outcomes in the near term. Therefore, FY22F earnings are anticipated to be robust, supported by healthy orderbook of RM2.3bn and improved profit margins. The increase in the availability of work orders will continue with higher capex spending by oil majors. We note that Petronas’ 2QFY21 capex was disappointing mainly due to project delays caused by movement restriction. Overall, 1H2021 capex of RM12.7bn (-14% YoY) appears to be below its annual plans, accounting for only 28% to 32% of its RM40bn to RM45bn target. This suggests that total 2021 spending could be about the same as last year (RM33bn) and will be stronger in 2022.

Source: PublicInvest Research - 27 Sept 2021