DAYA recently held an analysts’ briefing for its 4Q13 results. Key takeaways as follow:

- Cost overruns tanked 4Q13 results (RM15.6m loss). 4Q13 was dragged down by a USD9m (c.RM29.2m) cost overrun from DAYA’s TLO EOR project, which is nearing completion (96% completed in Dec-13). The cost overrun stemmed from an oversight by its subsidiary’s (Daya Offshore Constructors (DOC)) previous management. Guidance is there will be no more cost overruns from the project in the coming quarters. Excluding the USD9m loss, DAYA would have reported net profit of c.RM29m; still below our RM33.7m forecasts on the back of lower-thanexpected margins and delays in E&C projects from the technical services division and high set-up costs in the sub-sea division.

- Weak results to continue in 1Q14. Management guided a similarly weak 1Q14 as both the third-party chartered vessels; SD1 and SD2 were unutilised in most of 1Q. Work for Technip kick-starts in March, which will boost results from 2Q14 onwards. Another silver lining is that Technip project duration is expected to expand beyond 220 days (from the contracted 100-175 days) for SD1 and SD2.

- Potential legal suit with SBM Offshore. In short, DOC’s ex-CEO had entered into an unauthorised purchase of the DSV at USD180m. As DAYA was in no position to purchase the vessel, the deal was later nullified. However, this may lead to legal action by SBM Offshore. Management has guided that there have been no provisions for potential legal costs and damages as yet, but is continuing its dialogue with SBM to settle the issue amicably.

- Internal restructuring for Daya Offshore Constructors. Cognisant of the issues that this subsidiary faced in end-13, the group’s management has effected a change in the management. The subsidiary now has a new team of CEO, CFO and legal counsel. Management is also in the midst of fine-tuning its internal accounting controls to ensure such oversights do not recur.

- Order book at RM1.7b; tender book at RM1b. DAYA’s order book consists of higher contract values from the SD1 and SD2 projects (Technip is estimated at 220 days utilisation going forth). In terms of tenders, DAYA is bidding for RM600m worth of oil and gas projects and RM400m worth of technical services projects.

- Potential fund raising in the near-term. We were surprised to hear that management is contemplating another fund raising exercise so soon after the recent private placement. The exercise purportedly includes private placement or/and new rights issue with warrants and convertible bonds which target to raise c.RM930-950m to fund 100% the acquisitions of both SD1 and SD2 which could cost USD135-140m (c.RM438.8-455m) per unit. Previously, DAYA had planned co-owning SD-2 with Siem Offshore; hence this is quite a departure from the initial plans.

- Trading sell for now. We have lowered our FY14 net profit projections by 16.2% to RM34.4m (from RM41m) to account for: (i) lower subsea contributions given that DAYA now stands to earn lesser spot charter days, post the extension of the Technip contract; and (ii) slower project execution for the technical services. We also introduce FY15 numbers, which feature a growth of 9.1% mainly on the back of growth in the technical services. Based on an unchanged 12x target PER to CY15 EPS, our TP is now 36sen (from 41sen). Whilst 4Q13 and 1Q14 could just be temporary blips; we believe that short-term concerns related to internal controls issue and the impending dilutions from its fund-raising exercises could outweigh the longer-term outlook for DAYA.

Source: Kenanga