News

Dayang announced that its subsidiary Dayang Enterprise Sdn Bhd (DESB) has received a letter of award (LOA) from Sarawak Shell Berhad / Sabah Shell Petroleum Company Limited for the provision of hook up, commission and topside (HUCC) major maintenance services from 2013 to 2018.

The contract value is estimated to be slightly more than RM2bn for 5 years with an extension option of 1 year.

Comments

We are positive on the contract award which makes up part of our assumptions detailed in our report titled “High Hopes of Contract Wins” dated 18 Jan 2013. We understand that the actual value for the contract is circa RM2.5bn. Our latest upgrade to RM4bn win assumptions detailed in our report titled “Power House HUCC” dated 16 05 2013 steams from our belief that there are even more goodies to come. We believe Dayang’s chances of winning additional contracts (including a portion of Carigali PAN Malaysia) as high.

Market concerns over delays in contract disbursement and Dayang’s ability to win huge contracts have been overplayed. Potential selling pressure due to expectations of a RM2.5bn announcement shows misunderstanding of the contracts, market mispricing and hence opportunity to buy. Despite a competitive bidding process, we believe margins will be healthy due to economies of scale, strong negotiating power, locking in costs at current rates and improving utilisation.

The wins to date increase Dayang’s total orderbook by 233% (to circa RM4bn) and underscore our belief that Dayang is emerging as a power house offshore HUCC player in a region of aging O&G infrastructure (which badly needs upgrading) and massive Capex spending. 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, rerating as a large cap implying a TP of RM9.82 based on our large cap multiple of 20x.

Risks

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

Forecasts

• Maintained for now pending additional contract wins and 1Q13 results.

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. Price weakness due to ‘selling on news’ after this announcement is an opportunity to BUY.

Source: Hong Leong Investment Bank Research - 22 May 2013