Dayang’s 1Q20 core profit of RM20.9m was in-line with our/consensus expectations, improving significantly from a core loss of -RM4.8m in 1Q19 as the first quarter has always been a seasonally weaker quarter for offshore works due to the monsoon season. However, we foresee challenging times ahead for Dayang in FY20 due to Petronas’ plans to cut capex by 21% in FY20. We believe that the pledged capex cuts would negatively affect its PM-MCM and I-HUC contracts, which constitutes about 75% of its c.RM4bn orderbook. Hence, we downgrade Dayang to a Hold from a BUY previously with TP of RM1.22 based on 9x FY20 EPS (-0.3SD below 2-year mean) as we expect Petronas to defer c.15% of its planned PM-MCM and I-HUC works slated for FY20. We believe that Dayang is fairly valued at this juncture as its share price has plunged by 56% from its YTD peak.

In-line with expectations. Dayang’s 1Q20 core profit stood at RM20.9m (-68.9% QoQ, from -RM4.8m YoY), which we consider to be within our/consensus expectations despite only constituting 10/9% of full year forecast as 1Q has always been a seasonally weaker quarter due to the monsoon. No dividends were declared for the quarter, as expected. We derive core PATMI sum after adjusting for unrealised loss on forex amounting to RM4.3m and impairments on PPE for Perdana Petroleum amounting to RM7.2m in 1Q20.

QoQ: Dayang’s lower QoQ profit of RM20.9m (-68.9%) in 1Q20 was expected given seasonal weakness due to the monsoon season.

YoY: The huge YoY improvement in Dayang’s profit (from core loss of -RM4.8m) can be attributed to its strong offshore TMS segment underpinned by its recent I-HUC contract win from Petronas.

Outlook. While we believe Dayang has showed its prowess in effectively performing on its contracts, we feel its outlook is weak at this juncture due to the crash in oil prices as a result of the Covid-19 pandemic. Dayang is extremely dependent on Petronas as the latter has the prerogative over how much PM-MCM or I-HUC works it intends to do, as the aforementioned contracts awarded to Dayang were on call contracts with no specific values attached. Petronas has already planned to cut 21% of its capex for FY20 and the cuts could deepen if oil prices were to remain weak and volatile in the following months. We also expect the performance of its marine segment to deteriorate in the coming quarters due to the current oil oversupply situation globally as we believe that exploration capex would rank first in the pecking order of planned project deferrals for Petronas.

Forecast. We cut our earnings by 25/11% for FY20/21 as we expect Petronas’ capex cuts to have a profound impact on its earnings. We expect revenue to decline by almost 20% YoY as a result of (i) our 15% expected deferrals of its previously planned PM MCM and I-HUC works for FY20 and also (ii) lower overall contribution from its marine segment due to the negative outlook for OSVs and other exploration related activities. We expect 2Q20 results to be weak due to logistical issues stemming from the MCO, which is expected to result in higher operating costs and but we see sequential improvements in the following quarters as the MCO loosens up.

Downgrade to HOLD, TP: RM1.22. We downgrade our call from Buy to HOLD with a TP of RM1.22 (from RM1.81) based on an unchanged target PE of 9x (-0.3SD below 2-year mean) in view of the cautious outlook in spite of its decent 1QFY20 results. Still, this cautious view seems priced in as the stock has fallen by 56% from its YTD peak share price of RM2.95.

Source: Hong Leong Investment Bank Research - 24 Jun 2020