We came away from yesterday’s meeting with DAYANG feeling slightly more positive on the company with more clarity on its on-going corporate exercise and business developments. The company is still awaiting shareholder’s approval of the proposed acquisition of 5.74% stake in PERDANA due on 2nd July 2015. If successful, an MGO at RM1.55/share for the remaining stake will be triggered and shareholders will have time until mid-Aug 2015 to decide whether to accept the offer or not. While the listing status of PERDANA is likely to be maintained, DAYANG looks to gain more control in the vessel owner with potential addition of one board member and conversion of two DAYANG’s board representatives from non-executive directors to executive members. Operational-wise, it will be a status quo for PERDANA and DAYANG is hopeful about retaining its existing management to leverage on their expertise in marine industry. Slowing work orders in existing HUC contract is countered by its recently secured contracts (Facilities Improvement Project & EPCC for Bardegg & Baronia. Maintain MARKET PERFORM with a target price of RM2.50.

Update on corporate exercise. Extraordinary General Meeting of DAYANG will take place in Miri, Sarawak on 2nd July 2015 to seek approval for the proposed acquisition of 5.74% equity interest in PERDANA (MP; TP: RM1.55) from Affin Hwang Asset Management Berhad. The approval of the proposal will bring DAYANG’s stake to 38.0% from current 32%, triggering an MGO at RM1.55/share. According to the tentative timetable in the circular attached earlier, the closing date of the proposed MGO will be some time during mid-August 2015. In the event of acceptances for the offer not exceeding the 50% + 1 share level, upward revision in offer price is highly unlikely given near-term earnings risk for the target company and it may seek to slowly gain more control through open market and off-market transactions.

More light on DAYANG’s motive. Post the meeting with management, we gather that DAYANG does not intend to privatise PERDANA through the MGO. Listing status of PERDANA is likely to be maintained to ensure access to funding from the equity capital market to finance its long-term expansion plans. Instead, DAYANG intends to gain controlling stake of 50% +1 share in the company to better manage its fleet of vessels ensuring sufficient availability of vessels for its Pan Malaysia HUC contract. Currently, DAYANG is already in discussion to add another board member to PERDANA’s board with two of its existing nonexecutive board members for more hands-on control on the company. On top of that, we believe it is not likely for the current management team of PERDANA to be subjected to significant changes due to their expertise in the marine business.

Long-term plans for PERDANA. Business operations of PERDANA are expected to remain status quo if DAYANG were to gain a controlling stake. The delivery of two 500-men accommodation work barges to be delivered in 2016 is most probably delayed for 6 months, allowing for more breathing space for the target company to secure charter contracts in the challenging OSV market. Aside from that, the group has also made clear of its intention to make PERDANA Shariah-compliant by converting its USD borrowings to Islamic MYR borrowings. This we believe will be a positive catalyst to the PERDANA as it will have access to the GLC-linked and other Shariah investors.

Recent business developments for DAYANG. HUC activities appear to be weaker with Shell running slow compared to a year ago and confirmed orders from Petronas Carigali remaining uncertain. However, things appear to be more positive on its recently secured jobs namely Facilities Improvement Project (FIP) contract (RM250m) and EPCC Bardegg-Baronia contract (RM280m) that still look strong and poised to be on track with its scheduled progress in the coming years. We also believe in the possibility of higher upside on these contracts due to variation orders when the contract undergoes execution phase, suggesting potential upside for earnings contribution from these contracts. To recap, we have imputed contract replenishment of RM500m for both FY15 and FY16 for the group earlier. It looks well on track to hit our target with RM400m tenders submitted and another RM1.0b to be submitted within the next quarter.

Maintain MARKET PERFORM. While Petronas’ renegotiation of existing contract terms are still on-going, we believe it is not a major concern as we have already factored in slower revenue recognition from its existing HUC contracts earlier. Moreover, it is believed that the group will only agree to a discount (possibly 10%) if it were to obtain further extensions of contracts in return to protect its interest. Overall, the company’s fundamental remains solid albeit it is not entirely spared from the overall industry slowdown. We maintain our MARKET PERFORM rating on the stock with TP of RM2.50 based on unchanged CY16 PER of 12.0x. Risks to call include: (i) slower-than-expected order book replenishment and (ii) lower-thanexpected HUC margins. 

Source: Kenanga Research - 25 Jun 2015