We are initiating coverage on Dayang Enterprise Bhd (DAYANG) with an OUTPERFORM call as our target price of RM4.86 (based on a PER target of 15x on CY14 EPS of 32.4 sen) implies a total return of 38.6% to its current share price. DAYANG is a brownfield services oil and gas provider and is one of the frontrunners for the upcoming Pan Malaysia Hook-up and Commissioning project besides Petra Energy. Given its steady track records, we expect the company to secure a large portion of the estimated RM8-10b rollouts, which we believe will prompt a re-rating of the stock. We forecast a 2-year net profit CAGR of 32.1% and FY13-14 net profit of RM141m and RM178.3m respectively. We also favour the stock for its: 1) sterling execution track record and 2) management’s strong cash flow policies.

Strong candidate for the upcoming Pan Malaysia Hook-up and Commissioning (HUC) project. The company is one of the main front-runners given its sterling historical execution track record. We notice the market is speculating quite a wide range of potential contract wins (RM1.5b-RM4.0b) for DAYANG from this Pan Malaysia HUC project. However, we ourselves reckon that the ultimate award number could lean towards the higher end of the range given that its vessel support provider, Perdana Petroleum Bhd (“PERDANA”, OP; TP: RM1.62), has extended its newbuilding plans, which will help DAYANG to take up a bigger job scope. For now, we have conservatively assumed a RM3.0b win rate, which will inflate DAYANG’s order book by 3.5x from RM1.2b currently.

Tie-up with PERDANA is a good strategy. DAYANG has an agreement with PERDANA for the use of the latter’s fleet on a “first-rights-of-refusal basis” in the event it wins a fair share of the project. We view the pair-up with PERDANA as a smart move given the following factors: 1) the accommodation workbarge/boat market seemed to be getting tighter for third-party vessel charterers, which has resulted in rates trending up; 2) it will save DAYANG the extensive upfront capex outlay; and 3) it will free DAYANG from having to manage a large vessel fleet, which is not its core expertise. DAYANG currently holds a 26.1% stake in PERDANA and equity accounts PERDANA earnings as an associate income.

Poised for a re-rating? DAYANG currently trades at a forward CY14 PER of 12.95x on the back of a consensus CY14 net profit of RM147.8m. The share price valuations have surpassed DAYANG’s 5-year forward average PER of 8.75x and is reaching the historical high of 13.1x, which theoretically suggests peak valuations. However, we believe that the consensus forecast may have been too conservative. Assuming RM3.0b in contract wins, this will likely see the company recording FY14 net profit and EPS of RM178.3m and 32.4sen respectively. In such a case, the stock would currently only be trading at a FY14 PER of 10.7x. This is still attractive vis-à-vis the historical forward valuation of 16.3x that its nearest competitor, Petra Energy Bhd (“PENERGY”, Not Rated) traded at in 2007-2008 when it won the Shell and Petronas Carigali hook-up and commissioning projects then. It is also on this basis that we believe DAYANG will see a re-rating should it secure the Pan-Malaysia HUC contract, which could increase its order book (RM1.17b) by 3.5x.

Risks include: 1) A downturn in the oil & gas sector that could lead to an overall delay in its contract executions along the years; 2) lower than expected contract wins and 3) Its inability to manage new contracts, which would lead to lower-than-expected margins and a blemished track record.

Source: Kenanga