Period  3Q13/9M13

Actual vs. Expectations Dayang Enterprise Bhd (DAYANG)’s 3Q13 net profit of RM32.0m brought its 9M13 core net profit to RM92.8m. This is below both our (RM140.6m) and consensus (RM144.8m) fullyear expectations, accounting for only 66.0% and 64.1% respectively.

 We believe the variance to our forecasts is largely due to mobilisation costs incurred in the execution of the Pan-Malaysia HUC contracts that has resulted in lower-than expected margins in the quarter.

 Our core net profit excludes a one-off revaluation gain of RM32.7m in 1Q13.

Dividends  No dividend was declared in the quarter.

Key Results Highlights QoQ, 3Q13 net profit fell by 9.4% from RM35.3m in 2Q13 largely due to lower margins from the offshore TMS division arising from the mobilisation costs incurred in the preparation for the upcoming Pan-Malaysia HUC contract.

 YoY, 3Q13 was down 22.7% from RM41.3m in 3Q12; again due to the high mobilisation costs in the current quarter.

Outlook  DAYANG’S longer-term prospects are strong given that around 77% of its RM4b orderbook extends until 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 on its previous topside maintenance projects) will also provide further catalyst to DAYANG’s earnings.

Change to Forecasts We believe we might have been too aggressive in our FY13 margin assumptions for the Pan-Malaysia HUC work this year, as such we now reduce our EBIT margin for the Pan Malaysia HUC contract to 19% (from 20% previously) to account for the start-up costs. This lowers our FY13 forecasts by 6.8% to RM131.6m (from RM140.6m). We highlight that even after the revised forecasts, we still expect an impressive 29.4% EPS growth for FY13E.

 Whilst we have cut our FY13 forecasts, we remain optimistic on the FY14 prospects due to the HUC project. We have finetuned our associate earnings to RM23.1m (from RM18.8m) in line with our earnings revisions for PERDANA (OP; TP:

RM2.50) due to the expected lease savings after it acquired three vessels that are currently on sales and leaseback agreements, which increased our net profit projections by 1.5% (from RM222.1m).

Rating Maintain OUTPERFORM

Valuation  Our target price is bumped up slightly to RM6.15 (from RM6.06) based on an unchanged 15x core FY14 EPS of 41sen.

 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 to Our Call (i) 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

 (iii) lower-than-expected margins.

Source: Kenanga