Dayang’s 1Q19 core losses of RM5m was below our/consensus expectations on weaker offshore TMS and marine charter segments. However, we believe Dayang would be able to return to the black in the subsequent quarter. Meanwhile, we reckon that the recently announced restructuring plan will strengthen its balance sheet and provide capital for further expansion. Despite cutting our FY19-20 earnings by 10%/9%, we upgrade the stock to HOLD with lower ex-TP of RM0.88 (from RM1.02) in view of stronger QoQ results to be offset by short term overhang from the on-going corporate exercises.

Below expectations. Dayang recorded core loss of -RM4.8m in 1Q19. It was below our/consensus profit estimates of RM117.9m and RM116.8m due to weaker than expected contribution from both offshore TMS and marine charter segments. No dividend was declared, as expected.

QoQ: Dayang slipped into core loss of -RM4.8m in 1Q19 from RM93.4m profit in 4Q18 dragged by weaker offshore TMS segment (-70% QoQ; lower lump sum work orders) and marine charter segment as a result of lower vessel utilisation (36% vs 4Q18’s 73%).

YoY: 1Q19 core losses widened by 31% from -RM3.7m in 1Q18 no thanks to weaker offshore TMS segment (-22% YoY; lower work orders & margins). This is cushioned by better marine charter division underpinned by stronger utilisation of 36% (vs 27% in 1Q18).

Outlook. We expect Dayang to record stronger QoQ results in tandem with higher upstream activities post monsoon season underpinned by its existing orderbook of c. RM3.0bn. On the other hand, Dayang’s 60.5% owned Perdana (Not-Rated) is also targeting full year vessel utilisation of 70% this year, slight improvement from 64% in FY18.

Restructuring. Dayang recently proposed long-awaited debt restructuring plan involving: (i) RM683m sukuk issuance to repay both Dayang and Perdana’s debt, (ii) 97m rights (1 right for 10 shares; yet to decide on issue price) for debt repayment and (iii) 10% private placement for sukuk sinking fund, capex and working capital purposes. In return, pursuant to Perdana’s proposed rights RCPS, Dayang will subscribe up to RM455m of new RCPS in Perdana (10 year tenure at 1:1 conversion ratio). While Perdana’s net gearing will improve significantly to 0.15x (from 1.3x), Dayang’s net gearing will improve marginally to 0.61x (from 0.77x). We believe it is essential to prevent Perdana from a financial default and could reap long term benefit from the stronger balance sheet.

Forecast. Slashed FY19/20 earnings by 10%/9% respectively after imputing weaker contribution from both offshore TMS and marine charter segments. FY21 earnings of RM111.3m (+6% YoY) is introduced based on annual contract replenishment of RM800m and 75% vessel utilisation.

Upgrade to HOLD, lower ex-rights TP: RM0.88. Post adjustment, TP is lowered to RM0.88 (from RM1.02) on an ex-rights basis (RM0.89 on a cum right basis) based on SOP valuation (9x FY19 PER for TMS segment and 0.3x PBV for OSV segment). Given that share price has fallen 21% subsequent to the 1Q19 results announcement, we believe the market has pretty much priced in the earnings weakness. Thus, we upgrade our stock rating to HOLD (from Sell).

Source: Hong Leong Investment Bank Research - 24 May 2019