Results

• Within expectations: 3Q16 core net profit came in at RM20.5m, bringing 9M16 core loss to RM10.7m, deemed within our expectations (full-year forecast: RM0.5m profit) but below consensus (RM30.5m).

Deviations

• None.

Highlights

• YoY, 3Q16 core net profit improved by 57.3% YoY to RM20.5m primarily due to improvement in top line thanks to improvement in vessel utilisation, higher work orders and higher profit margins of work done for HUC projects in the quarter.

• QoQ, the group reversed to RM20.5m profit in 3Q16 from loss of RM6.6m in the preceding quarter due to higher work orders performed coupled with improved profit margins and higher marine vessel utilisation.

• Cumulatively , the group posted a loss of RM10.7m in 9M16 vs. core net profit of RM82.8m in 9M15 mainly underpinned by (i) significantly lower vessel utilisation for Perdana YoY (ii) dip in HUC work orders as its major clients slowed down the activities in view of low oil prices, and (iii) higher finance cost as a result of debt consolidation of Perdana’s borrowings.

• In April, the group completed the issuance of Sukuk Murabahah worth RM635m guaranteed by Danajamin Nasional Berhad to adhere to the Shariah laws. This loan would have a tenure of 12 years from the date of issuance, reducing the group’s credit risk in the near term.

• Despite recent encouraging recovery in earnings due to higher marine vessel utilisation, 4Q16 would be a seasonally weakest quarter of the year due to the monsoon season leading to lower activity.

• While we concur with the management’s strategy of acquiring Perdana as a viable strategy, benefits of synergy would only be able to be reaped in the longer run.

Risks

• Political risk; Delays in contract disbursement; and Execution risk.

Forecasts

• Maintain forecast.

Rating

HOLD ( ↔ )

• While recent earnings recovery is encouraging coupled with strong contract execution, we believe that it is still too early to get overexcited about the company’s prospects as the recovery may not be sufficient to justify valuation rerating in the near term.

Valuation

• Maintain HOLD call on the price with TP lowered to RM0.97 from RM1.11 as we reduce FY17 PBV multiple target to 0.7x from 0.8x previously due to heightened uncertainty of oil prices prospect. Uncertainty of OPEC production plan and expected US production recovery may pose earnings headwinds to Dayang in 2017.

Source: Hong Leong Investment Bank Research - 23 Nov 2016