DAYANG has proposed to acquire a 5.7% stake in PERDANA from Affin Hwang Asset Management with consideration of RM66.6m or RM1.55 per share, which will increase its stake from 29.8% to 35.5%. If the offer is accepted, a MGO will be triggered for the remaining stake. However, DAYANG would like to maintain its listing status in contrast a full privatisation judging from the conservative offer. Cash offer fuelled by debt financing is highly possible given its earnings accretive to DAYANG while Islamic financing option would be considered to maintain DAYANG’s Shariah compliant status. DAYANG will be the biggest HUC player in local market post acquiring PERDANA and this positions them better for the next round of Pan Malaysia Umbrella contract bidding in 2019 possibly. TP upgraded to RM2.73 based on higher FY16 PER of 12.0x due to potentially value from the acquisition from business synergies. Call on stock upgraded to MARKET PERFORM from UNDERPERFORM.

Proposal to acquire 5.74% stake. DAYANG has proposed to acquire RM43.0m shares of PERDANA (MP: TP: RM1.55) from Affin Hwang Asset Management Bhd for a consideration of RM66.6m (RM1.55/share). This represents 5.74% interest in the stock and brings DAYANG’s stake to 35.5% from 29.8% previously. This will trigger the Mandatory General Offer (MGO) for the rest of the equity that it does not own if Affin accepts the offer within three months of the offer as stipulated in the contract. This is expected by the market judging by the share price run-up of both stocks in recent months until their suspension yesterday. According to Bloomberg, DAYANG first bought into PERDANA since late 2011.

Our take on the offer. The offer price of RM1.55/share implies FY16E forward PER of 11.6x, which is considered fair but not compelling as it values PERDANA at a slight discount to its historical 2-year mean PER of 12.1x. This acquisition price is more favourable for DAYANG’s shareholders as it gives the company exposure to PERDANA’s relatively young fleet of OSV vessels to capitalise on long-term opportunities in Hook Up & Commissioning (HUC) contracts locally. The control over PERDANA will make DAYANG the largest HUC player locally, therefore, putting them in better position to take on larger jobs.

No intention to take PERDANA private. From the conservative offer price, we believe DAYANG has no intention of taking PERDANA private. We believe its objective is to gain greater control (>50.0%) of PERDANA while maintaining its listing status. The move is justifiable from DAYANG’s perspective, which allows it to exert greater control over PERDANA’s assets while minimising the total amount of funds to be raised. To note, DAYANG’s maximum stake in PERDANA is 75.0% in order for the acquirer to maintain its listing status. In order to achieve this, DAYANG needs to raise another c.RM445.2m assuming RM1.55/share offer price to remain.

Financing for the deal. There are three potential scenarios to finance the acquisition of the remaining stake: (i) scenario 1: all stock offer, (ii) scenario 2: all cash offer funded wholly by bank borrowings, and (iii) scenario 3: mix of cash (debt) and stock. We believe scenario 2 is most likely as it is earnings accretive for DAYANG’s earnings (FY15: +7.2% and FY16: +10.6%) compared to expected dilution in earnings for the other 2 scenarios as a result of new shares issued. Moreover, scenario 2 will only bump up DAYANG’s gross gearing from 0.2x to 1.1x in FY16, which is still a manageable level for the company.

Will still be Shariah-complaint post-deal. While we think the group’s debt-total asset ratio will exceed 33.0% threshold to remain Shariah compliant, we reckon that it might be apt to take on Islamic loan financing to maintain its status. It will be a sensible move whereby interest in the stock by government-linked funds could still be maintained post the upcoming corporate exercise. Financing cost of the potential Islamic loan financing remains unclear for now, but we reckon it will be similar to the group’s current average financing cost of 5.0% or slightly higher.

Long-term value to be unlocked, Upgrade to MARKET PERFORM. While the O&G sector’s valuation range may be depressed currently amid the volatile oil market, we believe DAYANG deserves to trade at higher PER valuation with the possibility of it taking significant control of PERDANA due to: (i) improved long-term prospect of securing larger HUC contracts, (ii) potentially higher margins with more vessels owned rather than chartered-in, and (iii) rerating of PERDANA’s valuation in the event of strong sector recovery. Hence, we decided to upgrade our TP to RM2.73 from RM1.74 previously, based on 12x PER which is close to its 5-year mean PER of 12.8x (from 10.0x) pegged to FY16 EPS due to improved long-term prospects on possible acquisition of PERDANA. Thus, we upgrade our call on the stock to MARKET PERFORM from UNDERPERFORM. If the deal does not go through, our TP would have been reduced back to RM1.74 assuming similar downcycle scenario.

Source: Kenanga Research - 15 May 2015