Period

2Q15/1H15 Actual vs. Expectation

1H15 results came within our expectations but below consensus with net profit of RM69.7m making up 49.8% and 41.0% of our and consensus full-year forecasts, respectively.

Dividends

No dividend was declared for the quarter as expected.

Key Results Highlights

2Q core net profit plunged 35.2% YoY to RM35.4m from RM54.6m due to lower HUC work orders as compared to last year amid cost-cutting measures from its PSC clients. This was worsened by loss of RM3.7m registered in the quarter compared to a profit of RM5.9m previously from its associate, PERDANA (MP; TP: RM1.55) due to lower vessel utilisation. Notwithstanding, better overall EBIT margin of 29% (compared to 27.9%) possibly due to efficiency gains helped to offset the decline in profitability.

On QoQ basis, 2Q15 core net profit gained slightly by 3% despite a 8.2% QoQ decline in the group top line on the back of significant gain in EBIT margin to 29% from 23% in the preceding quarter. This is a result of higher profit margins of work orders done in the quarter compared to 1Q15.

In 1H15, cumulative core net profit plunged 22% YoY mainly attributable to lower work orders received and performed. Its associate registered a loss of RM1.2m from a gain of RM11.3m in 1H14 due to lower vessel utilisation. As a result of higher margin works done in 2Q15, the group managed to achieve a slightly higher EBIT margin of 25.9% vs. 25.3% in the same time period last year.

Outlook

Order book currently stands at RM3.8b, expected to span until 2018.

We do not foresee positive surprises from its associate, PERDANA, in 2015 in view of the challenging local OSV market with demand likely to come off as O&G activities are slower compared to last year.

Timing risk is present for its HUC projects, which account for a significant portion of the group’s revenue contribution as its oil majors clients seek to defer contracts partially to later years in lieu of uncertainty in crude oil prices.

DAYANG is expected to consolidate PERDANA’s earnings to its profit & loss as it is now holding 94.8% stake in the latter. Although management intends to keep PERDANA’s listing status, it is tough for DAYANG to reduce its shareholding given the current challenging O&G market.

Change to Forecasts

We maintain our earnings forecast for now.

Rating

Maintain MARKET PERFORM.

Valuation

TP is reduced to RM1.67 from RM2.50 after downgrading our target PER to 8x from 12x previously in view of weaker oil price outlook for the next two years. This is consistent with the 8x PER multiple that we have applied for small cap service players. While target PER could be lower at 7x under the worst case scenario, we ascribed a higher multiple to factor in potential earnings growth of 30.3% in FY16 due to new contracts secured contribution.

Risks to Our Call

(i) Slower than expected work orders for HUC contract, and (iii) lower-than-expected margins.

Source: Kenanga Research - 26 Aug 2015