Dayang secured the 5+1 year PM-MCM contract from JX Nippon. We expect more contract awards by other PSCs at lower value and margins as compared to the previous award back in 2013. We estimate this contract worth RM100m, bringing its YTD sum to RM900m. As it is still within our replenishment assumptions, we keep our earnings forecast. All in, maintain HOLD recommendation with unchanged TP of RM0.76.

NEWSBREAK

Dayang has been awarded a contract by JX Nippon Oil & Gas Exploration (Malaysia) Limited (JX Nippon) 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

4th PM-MCM contract. We are positive on the contract win as the 5 year maintenance contract will provide earnings visibility for its bread and butter business. Recall that Dayang won the hook-up, commissioning and topside maintenance services 5+1 year contract from JX Nippon for RM100m in May 2013. While the contract value is not disclosed, we were guided the total firm contract value could be similar to the previous one, estimated at RM100m.

Still expecting more. Recall that Dayang also won the similar contract from Sarawak Shell Berhad (SSB)/ Sabah Shell Petroleum Company Limited (SSPC), and Petronas Carigali for RM2.4bn and RM1.3bn 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 this new contract will lift its YTD win to RM900m, accounting 60% of our orderbook replenishment of RM1.5bn in FY18.

Maintain HOLD, TP: RM0.76. We reiterate HOLD recommendation on the stock with unchanged SOP-driven TP of RM0.76 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 Aug 2018