News    Yesterday, Dayang Enterprise Bhd (DAYANG) announced that it had received yet another Hook-up, Commissioning (HUC) and Topside Major Maintenance Services contract from Sarawak Shell Bhd. This time, the contract is estimated to be worth slightly more than RM2.0b and is for a duration of five (5) years with an extension option of one (1) year.

Comments    Assuming this contract is worth about RM2.2-2.4b, it will raise DAYANG’s YTD order wins to RM2.5-2.7b, which  is close to our assumption of RM3b in contract wins for the year. It also brings the company’s order book up to RM3.7-3.9b (from RM 1.48b previously).

We believe this is a landslide win for DAYANG given that it is much larger than Dayang’s previous historical contract win of RM800m.

We understand that the company has also put in its bid for a slice of the Petronas Carigali (PCSB) portion of the HUC work. Based on previous Bursa announcements, the PCSB contract for two years is worth c.RM400m. Assuming  a similar contract amount on a 5-year basis, it could now be worth c.RM1.0b. We believe DAYANG’s chances are high given its sterling execution track record.

Outlook   DAYANG is a strong candidate for any of the upcoming packages for the Pan Malaysia HUC due to its sterling historical execution track records. 

DAYANG is expected to announce its 1QFY13 results this evening, which is likely to be broadly-in-line on the back of stable margins from its existing projects (i.e. PCSB Topside Structural Maintenance and Sarawak Shell & Sabah topside maintenance contract). 

However, we expect to see earnings strengthen from 2Q13 onwards as 2Q-3Q are typically stronger quarters and earnings are bolstered by  the new Pan Malaysia contracts which we expect will kick-in at tail-end of 2013. 

Forecast   We have increased DAYANG’s contract win estimate by another RM700m as we assume that it can bag a portion of the Petronas Carigali’s contracts within the year. However, we are only assuming a 3-month contribution versus a 5-month contribution for the initial RM2.7b win. We are also raising our EBIT margin assumption for the new contracts to 22% (from 20% previously) as we believe that the company will be able to execute the new work given its strong track record.

Our changes have lifted our FY13-14E EPS by 7.2-19.2%.

Rating Maintain OUTPERFORM

Valuation    Given the earnings upgrades, we have raised our target price up to RM5.80 (from RM4.86 previously) based on an unchanged 15x CY14 EPS of 38.6 sen. The ascribed target PER is higher than its historical peak forward PER valuation of 13.1x due to the potential re-rating of the stock, which is expected to post higher-than-historical contract wins.

Risks   (1) A downturn in the oil & gas sector that could result in delays in contract rollouts; (2) delay in the Pan-Malaysia HUC project, which will reduce the potential earnings being recognised in the year and (3) lower than expected margins, which will also affect its earnings growth.

Source: Kenanga