We have recently held a conference call with Dayang and remain upbeat on the recovery of Dayang as we believe that Dayang has seen a material pick-up in work orders and activity in 2Q21 from its HUC business. However, we expect 1Q21 to remain lackluster due to incidence of bad weather and Covid-19 which has struck Dayang in 1Q21. Maintain BUY at TP of RM1.70 at target PE of 12.5x and 0.7x P/B for its OSV segment.

Improvements expected from 2Q21. There has been a material pickup in activity in 1Q21 as compared to 4Q20 from the procurement of materials for its HUC business. However, most of its contracted assets are only expected to be converted into revenue in 2Q21. Hence, we view that the recovery will only material in 2Q21. Overall, we expect a decent YoY growth in FY21 with 1Q21 being the weakest quarter of FY21. The increase in work activity for Dayang this year is expected to result in better margins due to its operating leverage. Its OSV business is also expected to go through a slow 1Q21 before picking up from 2Q21 onwards from the adverse weather impact and covid-19 cases which has hit Miri in 1Q21.

Placement exercise. Dayang’s placement exercise has been completed in early March 2021 where the Company has placed out 96m shares to raise RM133m at RM1.37/share (already accounted for in SOP). RM75m of the proceeds would be used for the redemption of its Sukuk on a request order basis while the remaining RM58m would be used to satisfy working capital requirements.

Project Safinah. Dayang will be submitting bids for 2 AHTS (Perdana) (RM70-80m each), 2 landing craft for Dayang Marine (RM15m each) from Petronas. We believe that Dayang is at the lower end of some of the projects bidded, which makes it very possible for Dayang to win these contracts. The role of Dayang is to enable Petronas to reduce their capex. The contract will be based on daily fixed cash flow payments with a ceiling price of RM39,000/day for 7 years. Dayang intends to raise the funds required for the aforementioned project from commercial banks, as the commercial banks are offering cheaper rates at around 4-4.25% p.a as compared to development banks which are offering an interest rate of about c.6% p.a. The AHTS projects are expected to generate a revenue of RM14m per year with operational cost of RM4m. We expect Dayang to breakeven on a net profit basis in the first 2-3 years of its contract before recording a positive net profit thereafter.

Sale of vessels. Dayang also intends to sell 2 of its old AHTS (aged 13-14 years) to lower the age profile of AHTS for Perdana. The current book value of these AHTS are about USD10m and its market value is about USD5m.

Capex. Dayang plans to allocate a capex of RM150m (67% debt; 33% equity) for FY21, where about c.RM20m (equity) will be allocated to its new yard in Bintulu for equipment. The yard is slated to be completed by end of august or early September 2021. The completion of the yard is expected to result in 10% cost savings for every project. The cost savings would mainly come from the streamlining of the procurement process. The bulk of the remaining capex (c.RM120m) will be spent on Project Safinah.

Forecast. No changes as we still expect a decent improvement YoY due to higher oil prices and higher overall work activity.

Maintain BUY with TP of RM1.70. We maintain our BUY call an unchanged TP of RM1.70 based on a target PE of 12.5x and 0.7x P/B for its OSV segment as we believe that Dayang should see a decent recovery in terms of its MCM and i-HUC work activity. Moreover, its cost optimisation measures carried out in FY20, should result in higher profit margins for the Company going forward

Source: Hong Leong Investment Bank Research - 24 May 2021