Dayang’s 1H19 core profit of RM54.2m was deemed above our expectations as we expect stronger 2H19 with the anticipation of better contribution from both offshore TMS and marine charter segments. We are not overly concerned by the news of I-HUC contract cancellation as Dayang would still be able to receive work orders from Petronas via an extension or additional farm-in contracts. Additionally, we understand Dayang’s 60.5% owned Perdana (Not-Rated) is eyeing to achieve average utilisation >80% in 2H19 (vs 57% in 1H19). With that, Perdana stands a good chance to breakeven in 2H19. Post earnings adjustment, we maintain BUY with higher ex-rights TP of RM1.65 (from RM1.43) after rolling forward our valuation base year to FY20.

Deemed above expectations. 2Q19 core net profit of RM54.2m (turnaround from RM4.8m losses QoQ, +67% YoY) brings 1H19’s total core net profit to RM49.4m (+72% YoY). At 39%/41% of our/consensus full year estimates, we deemed the results above our expectations as we expect stronger 2H19 with the anticipation of better contribution from both offshore TMS and marine charter segments. No dividend was declared, as expected.

QoQ: Dayang turned into core profit of RM54.2m from -RM4.8m in 1Q19 helped by better offshore TMS segment (+1.3x QoQ; higher work orders) and marine charter segment as a result of stronger vessel utilisation at 79% vs 1Q19’s 36%.

YoY: 2Q19 core profit widened by 67% from RM32.5m in 2Q18 thanks to stronger offshore TMS segment (+30% YoY; higher maintenance contract billings & margins). This was further backed by better marine charter division underpinned by stronger utilisation of 79% (vs 70% in 2Q18).

YTD: 1H19 core earnings jumped 72% from RM28.8m in 1H18 on the back of better EBIT margins for offshore OMS segment to 33.4% (from 30.1% in 1H18) as well as narrowed losses for marine charter segment as a consequence of better utilisation of 57% (vs 48% in 1H18).

Outlook. We expect Dayang to record stronger 2H19 results in tandem with higher upstream activities post monsoon season underpinned by its existing orderbook of c. RM2.8bn. Meanwhile, recent news reported that Petronas could have aborted the award of an integrated hook-up and commissioning (IHUC) contract, whereby Dayang is the incumbent player. However, we are not overly concerned by the cancellation as Dayang would still be able to receive work orders from Petronas via an extension or additional farm-in contracts. Additionally, we understand Dayang’s 60.5% owned Perdana (Not-Rated) is eyeing to achieve average utilisation >80% in 2H19 (vs 57% in 1H19). With that, Perdana stands a good chance to breakeven in 2H19.

Forecasts. Increase FY19/20/21 earnings by 9%/20%/24% respectively after imputing higher contribution from both offshore TMS and marine charter segments.

Keep BUY, higher ex-rights TP: RM1.65. Post earnings adjustment, TP is increased to RM1.65 (from RM1.43) on an ex-rights basis (RM1.73 on cum rights basis) after rolling forward our valuation base year to FY20. The on-going restructuring plan will allow Perdana’s net gearing to improve significantly to 0.15x (from 1.3x) while Dayang’s net gearing to improve marginally to 0.61x (from 0.77x). This eliminates investors’ concerns over Perdana’s going concern issue amidst strengthening its balance sheet. All in, maintain BUY on the stock with the expectations of strong earnings delivery backed by robust work flow.

Source: Hong Leong Investment Bank Research - 26 Aug 2019