Dayang’s 2Q20 Core Loss of -RM1.6m (QoQ: RM20.9m, YoY: RM54.2m) Was Below Our/consensus Expectations, Primarily Due to Larger Than Expected Work Deferments for Its I-HUC and PM-MCM Contracts. 1H20 Core Profit of RM19.3m (- 61% YoY) Only Accounted for 14/15% of Our/consensus Estimates. Its Offshore TMS Operating Profit Stood at RM22m (-42.9% QoQ, -71.1% YoY), the Largest YoY Decline It Has Seen in More Than 3 Years. We Foresee Challenging Times Ahead for Dayang in 2H20 as We Do Not Anticipate a Capex Revival Until the End of FY20. We Believe That Petronas’ Pledged Capex Cuts Would Continue to Negatively Affect Its PM-MCM and I-HUC Contracts, Which Constitutes About 75% of Its C.RM4bn Orderbook. Hence, We Downgrade Dayang to a SELL From a HOLD Previously With TP of RM0.87 Based on 9x FY21 EPS (-0.3SD Below 2-year Mean) as We Expect Petronas to Remain Prudent on Its Spending Despite the Recent Recovery in Crude Oil Price. Core Loss of –RM1.6m Was Derived After Adjusting for Unrealised Forex Gain of RM0.6m.

Below expectations. Dayang’s 2Q20 core loss of -RM1.6m (QoQ: RM20.9m, YoY: RM54.2m), came below our/consensus expectations as 1H20 core profit of RM19.3m (-61% YoY) has only accounted for 14/15% of our/consensus full year forecast. No dividends were declared for the quarter, none expected for the year. Core loss of - RM1.6m was derived after adjusting for unrealised gain on forex amounting to RM0.6m.

QoQ: Dayang’s core loss of -RM1.6m (QoQ: RM20.9m) in 2Q20 was primarily attributable to the oil price crash and lower propensity to spend by Petronas.

YoY: The huge YoY decline in Dayang’s revenue to RM170.9m (-31% YoY) was primarily attributable to the impact of Covid-19 and the global oil market glut. Vessel utilisation stood at 29% (-52% YoY) which lead to a 2Q20 core loss of -RM1.6m (YoY: RM54.2m).

YTD: Core earnings declined to RM19.3m (-61% YoY) mainly due to deferments of work orders for its I-HUC and PM-MCM segments due to the Covid-19 and the global oil market glut.

Outlook. Despite oil prices recovering from its lows of about USD20/bbl in March/April to an average of about USD45/bbl over the last 2 weeks, the prospects for upstream services players are still extremely tepid as we believe that Petronas would continue to remain prudent on its capex spending. 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 and 12% opex for FY20 and the cuts could deepen if oil prices were to remain weak and volatile in the following months. We believe that major deferments in I-HUC and PM MCM works will continue until 1H21.

Forecast. We cut our earnings by 71/42% for FY20/21 as we expect Petronas’ capex cuts to have a profound impact on its earnings. We expect FY20 revenue to decline by almost 31% YoY as a result of (i) 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.

Downgrade to SELL, TP: RM0.87. We downgrade our call from HOLD to SELL with a TP of RM0.87 (from RM1.22) based on an unchanged target PE of 9x (-0.3SD below 2-year mean) FY21 EPS in view of the negative outlook and weak 2Q20 results. We believe that Petronas would need to start spending more on capex for us to warrant a re-rating on Dayang.

Source: Hong Leong Investment Bank Research - 24 Aug 2020