Dayang secured the two 5+1 year PM-MCM contracts from KPOC and Repsol. We expect more contract awards by other PSCs at lower value and margins as compared to the previous award back in 2013. We estimate these two wins worth up to RM300m, bringing its YTD sum to RM800m. As it is still within our replenishment assumptions, we keep our earnings forecast pending 2Q18 results announcement this week. All in, maintain HOLD recommendation with unchanged TP of RM0.68.

NEWSBREAK

Dayang has been awarded two contracts by Kebabangan Petroleum Operating Company Sdn Bhd (KPOC) and Repsol Oil & Gas Malaysia Limited respectively for the provision of Pan Malaysia Maintenance, Construction and Modification (PM-MCM) contracts. 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

2nd & 3rd PM-MCM contracts. We are positive on the contract win as the 5 year maintenance contract will provide earnings visibility for its bread and butter business. Note that Dayang did not secure the hook-up, commissioning and topside maintenance services 5+1 year contract from these two players in the previous round of bidding back in 2013. Similar to the first PM-MCM contract awarded by Murphy Oil, while the contract value is not disclosed, we were guided the total firm contract value could be worth up to RM300m depending on the amount of work orders received.

More contracts to come? Recall 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. No changes to our earnings estimates as we estimate these two contracts will lift its YTD win to RM800m, accounting 53% of our orderbook replenishment of RM1.5bn in FY18 pending 2Q18 results announcement this week.

Maintain HOLD, TP: RM0.68. We reiterate HOLD recommendation on the stock with unchanged SOP-driven TP of RM0.68 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 - 21 Aug 2018