Highlights

• We are turning more positive on Dayang as FY17 will be a stronger year for the company, underpinned by (i) higher HUC & Topside Maintenance orders on improved oil prices and (ii) better vessel utilisation of Perdana vessels with more contracts in hand.
• In 2017, its HUC work orders will improve as it is sitting on RM2bn orderbook. In addition, the group may potentially secure a share of Petronas maintenance contracts (MCM) and Pan Malaysia packages, which will be awarded this year.
• FY16 was a bad year for the group with HUC work orders at low due to weak oil prices, higher interest cost from Perdana debt consolidation and losses from its vessel business.
• However, on a core basis, its bread & butter HUC actually reported decent numbers with core PBT at RM64.7m, after excluding losses from Perdana of RM42.8m.
• Therefore, we revisit Dayang?s valuations and opine that SoP is a better valuation methodology for the group due to its 2 separate business natures.
• We value Dayang?s core HUC & Topside Maintenance business segment at RM1.03/share, pegging 12x PER to FY17 PAT of the business.
• For its OSV business (Perdana), we value it based on 0.5x to BV of RM0.77/share, translating into fair value of RM0.38/share, significantly below Dayang?s MGO price of RM1.25 (in terms of Dayang share base) in 2014.
• We believe Dayang would prefer to maintain its controlling stake in Perdana as that it is able raise find through equity financing (i.e. rights issue or private placement). Therefore, we anticipate near term corporate exercise by Dayang to improve the liquidity of Perdana Petroleum.

Risks

• Global recession hitting O&G price;
• High net gearing of Perdana;

Forecasts

• Unchanged.

Rating

BUY ↑

• Severely undervalued by the market with only its HUC business being reflected in share price. Expect re-rating on potential exercise to float Perdana?s shares and earnings to improve in 2017 and onwards.

Valuation

• Upgrade to BUY from HOLD with TP raised to RM1.42 (from RM1.11) upon application of SoP-driven valuation from PBV previously.

Source: Hong Leong Investment Bank Research - 11 Apr 2017