Period  2Q13/1H13

Actual vs. Expectations  Dayang Enterprise Bhd (“DAYANG”)’s 2Q13 net profit of RM35.3m brought its core 1H13 net profit to RM60.9m. This is slightly below both our (RM153.4m) and consensus (RM152.7m) full year expectations, accounting for only 39.7% and 39.9% respectively.

 Whilst earnings had improved on QoQ and YoY basis, the variance to our earnings estimate is we believe there could potentially be slower-than-expected recognition of revenue and lower margins for the new Pan-Malaysia hook-up and commissioning (“HUC”) project in 2H13.

Dividends  A 5.0 sen NDPS was declared, within our assumed full-year NDPS of 11.5 sen, and similar to the NDPS declared in 2Q12.

Key Results Highlights  QoQ, 2Q13 net profit grew by 37.8% from RM625.6m in 4Q12 on the back of higher revenue from both the offshore topside maintenance services (“TMS”) and marine charter divisions. This is normal as the first quarter is typically a seasonally weaker quarter due to the monsoon season. Earnings were also buoyed by better associate earnings from Perdana Petroleum (“PERDANA”; OP: TP: RM2.40) which saw improvements in-line with the pick-up in the overall offshore support vessel segment.

 YoY, 2Q13 was up 12.4% from RM31.4m in 1Q12 due to the pick-up in TMS activities for its main contracts (i.e. PCSB and Shell/Sarawak projects).

Outlook  DAYANG’S longer-term prospects are strong given that around 77% of its orderbook (RM4b) extends to 2018.

 Any improvement in PERDANA’s earnings will have a positive bottom-line impact on DAYANG through associate earnings contributions.

 Any margin expansion for its new projects (we have assumed a discount to its historical EBIT margins earned on its previous topside maintenance projects) will also provide a further catalyst to DAYANG’s earnings.

Change to Forecasts  Whilst earnings have improved QoQ, we believe we might have been too aggressive in our assumptions for the Pan-Malaysia HUC work that DAYANG won this year. As such, we have: (i) reduced our revenue from the Pan Malaysia HUC contract to RM250m (from RM300m); and (ii) revised our assumed FY13 EBIT margin to 20% (from 22% previously) to account for any exceptional start-up costs that might be incurred for this new project. This lowers our FY13 forecasts by 8.3% to RM140.6m (from RM153.4m). We highlight that even after our cuts, we still expect an impressive 38.9% EPS growth in FY13E.

 We are keeping our FY14 net profit forecasts as we expect earnings contributions to pick-up subsequently as DAYANG gets into the groove of this project after the start-up phase.

Rating   Maintain OUTPERFORM

Valuation  Our target price remains at RM6.06 based on an unchanged 15x FY14 EPS of 40.4 sen.

 The ascribed target PER is higher than its historical forward PER valuations due to a re-rating of the stock on its higherthan-historical contract wins.

Risks  (i) A downturn in the oil & gas sector that could result in contract rollout delays, (ii) delays in the Pan-Malaysia HUC project, which will reduce the potential earnings being recognised in the year; and (iii) lower than expected margins.

Source: Kenanga