Company Insight

Dayang is expected to release its 1Q earnings on 22 May 2013. Core earnings will not make up 25% of our full year estimates as the 1Q is seasonally slower due to monsoon and more importantly we expect the Hook Up Construction & Commissioning (HUCC) wins to mobilise in 2H13. We expect RM4bn HUCC wins this year detailed in our report titled “Power House HUCC” dated 15 May 2013. This includes the RM314m Murphy contract already won, see our report dated 6 May 2013. We expect 1Q13 to be better than 1Q12 which was savaged by bad weather.

There maybe an extra ordinary gain from the investment in Perdana (BUY) as they passed the 20% ownership (currently 26%) threshold for equity accounting in Feb 2013. Hence the company can now recognise a gain as Perdana’s stock traded above the average buying price in Feb. We do not include this extraordinary gain in our forecasts. Dayang’s acquisition of associate Perdana (BUY) at ‘pennies on the dollar’ (currently trading at above RM1.50) show cases the company’s excellent foresight and strategic prowess in securing marine assets cheaply at a time when demand was seen as weak. Our channel checks indicate it is now extremely difficult to secure quality O&G related vessels domestically to execute HUCC works. We thus expect Dayang to access Perdana’s marine assets to bolster chances of winning HUCC work. As the HUCCs mobilise we expect demand to tighten further.

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 and may cause the market to rate the company at our large cap PE of 20x (vs. 14x current ascribed value of RM6.87) which implies a TP of RM9.82, or additional 105% upside from our current TP.

Risks

• 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 RM6.87 based on an unchanged 14x FY14 EPS of 49.1 sen/share. We understand contract award will be split into packages which provide continuous newsflow to sustain investor’s excitement about the stock. Price weakness due to ‘selling on news’ after first announcement is thus an opportunity to BUY.

Source: Hong Leong Investment Bank Research - 20 May 2013