Company Insight

We recently met management for an update on the company following months of speculation on the possibility of contract wins from an estimated RM10bn of offshore hook up and commissioning and topside maintenance work.

The company remains optimistic on the bids.

Comments

In our report titled ‘High Hopes of Contract Wins’ dated 1 Jan 2013, we pre-emptively included a 12.5% win rate or RM1.25bn for a duration of 5 years. Starting Jun 13 and we also maintained our FY13 and 14 replenishment assumptions of RM170 and RM190m and assumed PATAMI margins to erode slightly from 25% in 2012 to 18% through to 2014, due to rising cost inflation as the O&G cyclical upswing intensifies. We see Dayang as the best exposure to the enlarged HUCC potential contracts because of its high margins, ability to execute and relative meaningful impact on its orderbook. Petra Energy (Not Rated) is also expected to benefit.

Should the company win a RM2.5bn share or more (assume the HUCC wins would replace replenishment) our back of the envelope EPS and TP scenarios are outlined below.

We conservatively value the company in the most top right quadrant. Improving economies of scale, Dayang’s strong negotiating power and the ability to lock in some costs at current rates and a bigger win rate may result in fundamental valuations in the bullish, bottom left hand quadrant. .

With the focus on the HUCC contracts we believe the market is unjustly ignoring other catalysts; entry into marginal fields, improving sentiment, possible regional expansion and the possibility of being a US$1bn mrk cap company which would put the company on the radar of more international funds.

Risks

• Political risk, Delays in contract disbursement, Execution risk.

Forecasts

Maintained.

Rating

BUY

• Positives –
  • solid track record and expertise in HUC.
  • captive market for topside maintenance.
• Negatives –
  • unsure of international growth prospects.
  • difficulties in sourcing O&G engineering talent.

Valuation

• We maintain our BUY call with an unchanged TP of RM4.00 based on an unchanged 14x (our small cap valuation multiple) FY14 EPS of 28.6 sen/share.

Source: Hong Leong Investment Bank Research - 30 Apr 2013