KUALA LUMPUR (June 6): CGS-CIMB has initiated coverage of Dayang Enterprise Holdings Bhd, with an "add" call and a target price of RM1.70, according to the research house note on Tuesday (June 6).

CGS-CIMB analyst Dharmini Thuraisingam said that the Sarawak-based offshore services provider in the oil and gas (O&G) industry had firmly established itself as a key provider of brownfield services in Malaysia since its inception in 1980.

“We believe it is well positioned to benefit from the planned increase in activity levels, given the group’s entrenched expertise and proven track record in the brownfield support services segment,” said Dharmini.

The analyst said that Dayang’s revenues are categorised into two key segments, namely topside maintenance services and marine offshore support services.

On the heels of a near tripling of profits in 2022 off a low base, CGS-CIMB forecast Dayang’s net profit to dip 6% in the financial year ending Dec 31, 2023 (FY2023), before resuming its growth trajectory and rebounding by 40% in FY2024, and 15% in FY2025.

“While the group’s weak set of results for the first quarter ended March 31, 2023 (1QFY2023) was clearly a setback, we believe the weakness in earnings was transient in nature, and expect profits to recover strongly in 3QFY2023, and for the momentum to continue in 2024 and 2025, as a smooth roll-out of work orders recommences,” she said.

Despite Dayang’s strong share price performance over the past 10 months of 33%, the analyst noted that the stock had de-rated from 12.4 times rolling one-year forward price-earnings to 8.8 times currently, as the share price lagged the 85% increase in Bloomberg consensus one-year forward net profit expectations.

“The stock currently trades at 12.5 times FY2023 price-earnings, supported by [an estimated] FY2023 and FY2025 net profit compound annual growth rate of 27% as order flows normalise, which translates into a price-earnings to growth ratio of 0.5 times," she said.

On CGS-CIMB's FY2024 estimates, the stock is trading at an ex-cash price-earnings of 7.4 times, which is well below its 10-year mean of 11.5 times.

“We consider such valuations attractive for an O&G stock with encouraging medium-term growth prospects, an excellent track record, and a net cash balance sheet (FY2023),” she added.

Meanwhile, potential catalysts for the stocks are new job wins, better-than-expected order flows and margins, and a recovery in quarterly profits. Downside risks are sustained delays in work orders and non-renewal of contracts.

At 10.34am on Tuesday, shares in Dayang were two sen or 1.72% higher at RM1.18, giving the group a market capitalisation of RM1.35 billion.

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