Post management meeting, we are turning positive on Dayang on the back of (i) potential local contract flow from Petronas, (ii) possibility to secure its first international jobs in Turkmenistan and Myanmar as well as (ii) turnaround of Perdana by next year. Pending finalisation of the PRS, we reckon the outcome should be able to strengthen its balance sheet. Upgrade to BUY rating with higher SOP-driven TP of RM0.79 (from RM0.76) after increasing our FY19-20 earnings by 4% and ascribing higher valuation of 0.3x PBV on Perdana.

International expansion. Dayang has participated in Petronas’ tender in Turkmenistan and Myanmar collectively worth USD250m involving on-shore and offshore maintenance contract and EPCC jobs. Any of these contract wins would mark its first international job and we reckon that the risk is relatively manageable given that the client is non-other than Petronas, which Dayang already has an established its track record with.

Petronas PM-MCM to fill next year replenishment. Current orderbook stood at RM3.0bn including the recently awarded Pan Malaysia Maintenance, Construction and Modification (PM-MCM) contracts. While the other PSCs have already announced their respectively selected contractors for the next five years, we understand that Petronas’ portion has been restructured again under the name of I-MCM and the invitation to bid is likely to be out in the near term. This contract is likely to have 5 years contract period, covering Sabah, Sarawak and Peninsular Malaysia. Note that Dayang was the incumbent for Peninsular Malaysia while Petra Energy (Not-Rated) and non-listed company, Coral Alliance were responsible for East Malaysia region.

Eyeing Saudi Aramco’s 5-year jobs. Currently, 15 of 16 Perdana’s vessels are being utilised with 8 of them working for Dayang, 2 on long term charters and the remaining 5 on spot charters. Perdana is partnering with an experienced local company in Middle East to bid for three 5-year bareboat charter contracts from Saudi Aramco using its high-spec AHTS (>10k BHPs).

Restructuring. Dayang’s 60.5% owned Perdana (Not-Rated) will begin its discussion with the respective financiers/Sukuk-holders on the proposed restructuring scheme (PRS) this week involving measures such as extension of tenure of borrowings, disposal of 2-3 vessels without contracts and negotiation of interest rate cut.

Forecast. We increase FY19-20 earnings by 4% to RM66.9m and RM81.3m on (i) higher contribution from TMS segment and (ii) higher vessel utilisation for Perdana to 75%-80% (from 65% previously). We estimate Perdana to achieve breakeven next year at 75% utilisation level.

Upgrade to BUY; TP: RM0.79. We upgrade the stock to BUY rating with higher SOP driven TP of RM0.79 (from RM0.76) with after earnings adjustment and ascribing higher valuation of 0.3x PBV on Perdana. This is premised on (i) continuous local contract flow from Petronas, (ii) possibility to secure its first international jobs in Turkmenistan and Myanmar as well as (ii) turnaround of Perdana by next year. At current share price, Dayang is traded at its trough valuation of 0.4x FY19 PBV.

Source: Hong Leong Investment Bank Research - 24 Oct 2018