Dayang secured the 5+1 year PM-MCM contract from Murphy and we expect more contract awards by other PSCs in this quarter. However, total PM-MCM contract value is expected to be much lesser than its previous total award of RM10bn, which Dayang secured RM4bn back in 2013 coupled with lower margins. Increase FY18-20 earnings by 3-19% after imputing higher orderbook win. All in, maintain HOLD recommendation with higher TP of RM0.68 after rolling forward our valuation base year to FY19.

NEWSBREAK

Dayang has been awarded a contract by Murphy Sarawak Oil Co. Ltd and Murphy Sabah Oil Co. Ltd for the provision of Pan Malaysia Maintenance, Construction and Modification (PM-MCM) contract. The duration of the firm contract is for 5 years effective from July 2018 and expires on July 2023 with an option to extend for another year. The value of the contract is based on work orders issued by the clients at a fixed schedule of rates.

HLIB’s VIEW

Long awaited replacement contract. We are positive on the contract win as the 5 year maintenance contract will provide earnings visibility for its bread and butter business. While the contract value is not disclosed, we were guided the total firm contract value could be worth more than RM300m depending on the amount of work orders received. Recall that Dayang won the hook-up, commissioning and topside maintenance services 5+1 year contract from Murphy Sarawak Oil for RM313.6m in May 2013.

More contracts to come. Apart from that, Dayang also won the similar contract from Sarawak Shell Berhad (SSB)/ Sabah Shell Petroleum Company Limited (SSPC), Petronas Carigali and JX Nippon for RM2.4bn, RM1.3bn and RM100m respectively back in 2013. We understand that Dayang has tendered PM-MCM contracts which consisted of 10 packages. Thus, Dayang is likely to secure more PM-MCM contracts from other PSCs given its incumbent position.

Weaker margins. Despite Dayang securing c.RM4.0bn HUC-maintenance works from these PSCs in 2013, we understand that only approximately half of the contract value has materialised as a result of work scope reduction and trimming of services rates by the clients following the plunge of oil prices in 2014. Given the rigorous cost optimisation over these few years, the project EBIT margins could be lower, estimated at 15%-20% vs its historical margins of 20%-25% before the plunge of oil prices.

Forecast: We increase our FY18/19/20 earnings by 6.4%/18.5%/2.8% after imputing higher orderbook replenishment of RM1.5bn from RM1.0bn in FY18 but we reckon that bulk of the earnings should be recognised in the next few years.

Maintain HOLD, TP lifted to RM0.68. We reiterate HOLD recommendation on the stock with higher SOP-driven TP of RM0.68 (from RM0.61) after rolling over our valuation base year to FY19 with the unchanged assumptions of (i) 10x PER for its offshore TMS earnings and (ii) 0.2x PBV for OSV segment.

Source: Hong Leong Investment Bank Research - 30 Jul 2018