Dayang’s outlook remains solid underpinned by its RM2.9bn orderbook and potential VOs. Post meeting, we increase our SOP-driven TP to RM1.15 (from RM0.91) after FY19-20 earnings adjustment of +26%/12%. Nonetheless, we reckon that share price may take a breathier in view of weaker QoQ earnings and slower contract flow. Since our upgrade to Buy in Oct last year, share price has delivered a peak return of 200% before declining -18% this week. Therefore, downgrade the stock to SELL as we believe the market is currently pricing in much stronger earnings expectations which may not be sustainable.

We Recently Met Up With Dayang With the Following Key Takeaways:

Orderbook. Current orderbook stands at RM2.9bn including Pan Malaysia Maintenance, Construction and Modification (PM-MCM) contracts from different PSCs. Apart of from existing contracts, Dayang is expected to receive additional lump sum work orders from clients. We understand there are also some variation orders (VOs) that have been carried out last year. All the VO costs have been recognised last year and its profits will be booked in 1HFY19, pending client approval.

Outlook. Petronas’ MCM will be restructured under I-MCM. However, the tender will only be out by 2H19 and thus contract award is likely to happen earliest by end-3Q19. This contract is likely to have a 5 year 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 the East Malaysia region. On the long term, other potentials would be coming from decommissioning and abandonment of structures, Petronas’ rejuvenation and EOR EPCC contracts as well as maintenance contracts in Brunei and Myanmar.

Marine segment. Perdana’s 1Q19 vessel utilisation is expected to be stronger YoY (vs 27% in 1Q18) at 35%-45% level but QoQ weaker (vs 73% in 4Q18). Overall, Perdana is targeting full year vessel utilisation of 70% this year, slight improvement from 64% in FY18. With that, Perdana could be still in a slight loss this year.

Margins. The exceptional strong performance in 4Q18 was mainly due to ramp up in offshore activities and additional work orders from existing contracts. However, we expect the gross margins to moderate from 57% in 4Q18 to 35%-40% range in FY19 even after factoring approval of outstanding VOs.

Restructuring. Perdana has started its discussion with the respective financiers/Sukuk-holders on the proposed restructuring scheme (PRS) involving measures such as extension of tenure of borrowings, disposal of 2-3 vessels without contracts and negotiation of interest rate cut. A third CDRC meeting was held to provide milestone updates and proposed scheme enhancement to all lenders. The CDRC program is expected to be completed by early 2020, 18 months from the date of admission, 2 July 2018.

Forecast. We increase FY19-20 earnings by 26% and 12% to RM115.6m and RM108.8m with more bullish assumption of VOs kicking in as well as better margins from the work orders received.

Take profit, downgrade to SELL, TP: RM1.15. Post earnings adjustment, our SOP driven TP is increased to RM1.15 (from RM0.91). Since our upgrade to Buy in Oct last year, share price has delivered a peak return of 200% before declining -18% this week. We advocate investors to take profit on the stock. Downgrade to SELL as we believe the market is currently pricing in much stronger earnings expectations which may not be sustainable.

Source: Hong Leong Investment Bank Research - 19 Mar 2019