Highlights

Weak 4QFY13 result due to one-off event… YoY, Daya’s 4Q13 earnings swung from profit to a loss of RM15m. Full year FY13 earning made up only 14% of consensus. This was mainly due to cost overruns at its first subsea project (Tapis EOR). As the project is almost near completion (~96% completed) and the cost overrun has already been fully reflected in Q4FY14, we view this as a one-off event.

Looking forward for SD1 and SD2…Siem Daya 1(SD1) and Siem Daya 2 (SD2) are expected to commence works with Technip Norge in Mar 13. 1QFY14 earning will remain weak given the initial mobilisation and charter costs. However, they will register maiden full contributions in 2QFY14 with deployment of 220-250 days/pa (vs. original 100-175 days).

Margin expansion for the propose acquisition… The company is working on a fund raising exercise to raise RM930m (combination of debt and equity, Ref Fig 1) to acquire 100% of SD1 and SD2 vessels. Each vessels cost around US$130-140m. The company expects saving of US$15-20k/day/vessel under an ownership model (vs. lease model). We estimate each vessel to generate RM24m PAT vs. RM6m under lease model. Management expect the corporate and acquisition to complete in 1H14.

Potential third vessel in 2H14? We understand the company is negotiating with Technip on a 3rd vessel charter. Successfully executing jobs on SD1 and SD2 will path the way for future SD3. If acquisition of SD3 in FY14 materialized, FY15 earnings could be boosted by ~30%, resulting in a drop in P/E to 10x while net gearing of circa 1.5x will remain below the company’s maximum tolerance of no more than 2x.

Not as dilutive as thought? Under the RM930m fund raising exercise, the company targets 65% from debt and 35% from equity (combination of private placement, right issue and convertible bond). We expect share base to enlarge from 1.39bn to 2.6bn after the exercise. Despite the huge dilution, average pre-tax margin for both vessels are expected to increase from 5% to 23% from lease to owned model (Ref fig 1).

Balance sheet remains comfortable… After the corporate fund raising, net gearing is expected to increase from 0.3x in FY13 to 1.1x in FY14.

Valuation

After the corporate fund raising to acquire 100% stake in both vessels, Daya is expected to trade at 25x FY14 and 13x FY15 P/E (Ref Fig 1, Scenario1). To note, we only factored one quarter of contribution under asset owned model in FY14 (as we expect the deal to complete in 2HFY14) and expect FY15 earnings to increase by 94% YoY given full year contributions from both vessel.

Source: Hong Leong Investment Bank Research - 6 Mar 2014