Company Insight

We believe Dayang is emerging as a power house offshore Hook Up Construction & Commissioning (HUCC) player in a region of aging O&G infrastructure (which badly needs upgrading) and massive Capex spending. Market concerns about capacity to digest huge contracts are overdone. An extremely stringent Petronas qualifying process, history of bidding for and executing contracts as well as increasing economies of scale suggest that capacity is a nonissue.

We have revised our forecasts to include RM4bn (previously RM2.5bn) of contract wins from an estimated RM10bn of offshore HUCC work consistent with our report titled ‘Really High Hopes of Contract Wins’ dated 30 Apr 2013. We indicated a fair value range of between RM6.00 to RM9.00. We continue to believe Petra Energy (RM2.5bn – RM2.8bn potential wins) will benefit but prefer Dayang due to higher margins, skilled execution and valuation. Associate Perdana (BUY) is also set to benefit.

We also increase net margins from our conservative 18% to 21.5% due to economies of scale, strong negotiating power and the ability to lock in some costs at current rates. Margins are likely to surprise on the upside due to improving asset utilisation. FY12 margins were 25%.

Our forecasts upgrade is inline with our belief that the O&G sector is in a cyclical upswing as Governments open new fields and strive to resuscitate O&G production detailed in our report dated 16 Apr 2013. Peak P/E multiples in the last upcycle hit 23x which based on our EPS would potentially value the company at RM11.29. Other catalysts; potential entry into marginal fields, improving sentiment, possible regional expansion and the possibility of being a US$1bn market cap stock which would put the company on the radar of more international funds.

Risks

• Delays in contract disbursement
• Execution risk.

Forecasts

• Revenue increased 16%, 42% and 42% to RM775, 1,252 and 1,315 and PATAMI increase 16%, 69% and 73% to RM153, RM270 and RM285 for FY13, FY14 and FY 15 respectively.

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 a higher TP of RM6.87 (previously RM4.00) based on an unchanged 14x FY14 EPS of 49.1 sen/share (previously 28.6 sen/share). We understand contract award will be split into packages. Price weakness due to ‘selling on news’ after a first announcement is thus an opportunity to BUY.

Source: Hong Leong Investment Bank Research - 16 May 2013