The restructuring is “smooth sailing” and we expect to see an uptick in activities in 2H19. We don’t discount Dayang receiving additional lump sum, work orders/VO in 2H19. Petronas’s domestic capex spending plans seems to suggest lumpy work flow for current incumbents. We upgrade our FY19/20/21 numbers by 11.2%/16.6%/16.4% as we factor in more VO’s kicking and better margins from the lump sum work orders. Maintain BUY with a higher ex-rights TP of RM1.90 – RM2.00 cum rights (from RM1.65 ex rights, RM1.73 cum rights).

Recap. Recall that 2Q19 was a stronger than expected quarter as Dayang turned to the black, recording a core net profit of RM54.2m from -RM4.8m in 1Q19. This was mainly due to better offshore TMS segment (revenue: +58% QoQ; operating profit: +1.2x QoQ) on the back of higher work orders and the marine charter segment recording stronger vessel utilisation of 79% vs. 36% in 1Q19. Margins wise, Dayang recorded a healthy expansion of 11.1ppts QoQ to 37.8% from its TMS side, whilst its marine segment turned to the black at the operating level QoQ.

2H19. We expect a sequentially stronger 2H19 as upstream activities gain traction post monsoon season, underpinned by an order book of c. RM3.3bn. Furthermore, we understand that Dayang’s 60.5% owned Perdana (Not-Rated) is eyeing to achieve average utilisation of >80% in 2H19 (vs 57% in 1H19). Perdana continues its sequential improvements, as vessel utilisation continues to pick up steadily, on a full year basis we can expect utilisation to average ~70% (FY18: 64%; FY17: 52%), thus narrowing Perdana’s loses (FY18: -RM41.0m).

Restructuring update. Dayang has recently concluded an EGM for its rights issue. We understand that price fixing is to be undertaken in early November. The Sukuk program is running concurrently and is awaiting submission to the SC. We can expect the Sukuk drawdown will parallel Perdana’s Sukuk restructuring exercise, which aims to pay down RM365m in 4Q19. With regards to the RCPS, we understand that an EGM has been scheduled mid-October.

Petronas. Capex spending as end of 1H19 amounted to RM15.7bn (-10% QoQ; -21% YoY), accounting for 31.6% of Petronas targeted full year capex estimate of RM50bn (+7% YoY). Petronas committed that there will be a ramp up in investment activities in 2H19 with c.RM17.5bn to be spent domestically in 2H19. Premised upon this guidance, we can expect very lumpy work orders for Dayang and other incumbents in 2H19 assuming that a call out from the client was received.

Outlook. In the interim, apart from existing contracts (order book estimated at c.RM3.3 bn in 1H19), we don’t discount Dayang receiving additional lump sum work orders and variation orders (VOs) from clients that could’ve been undertaken in 3Q19. Prospects for Dayang remains rosy in the mid-term; other potentials would be coming from decommissioning and abandonment of structures, Petronas’ rejuvenation and EOR EPCC contracts as well as maintenance contracts within the ASEAN region

Forecasts. We are upgrading our FY19/20/21 numbers by 11.2%/16.6%/16.4% as we factor in more bullish assumptions of VO’s kicking in as well as better margins from the lump sum work orders received from their TMS segment - premised upon lumpy 2H19 domestic capex from Petronas.

Maintain BUY and ex-rights TP: RM1.90. Post earnings adjustment, our SOP based TP increases to RM1.90 ex-rights or RM2.00 cum rights (from RM1.65 ex-rights basis; RM1.73 cum rights).The on-going restructuring plan eliminates investors’ concerns over Perdana’s going concern issue amidst strengthening its balance sheet. Maintain BUY on the stock with the expectations of strong earnings delivery backed by robust work flow.

Source: Hong Leong Investment Bank Research - 9 Oct 2019