Following a meeting with DAYANG’s management yesterday, we are feeling more assured in the longer run on the company after obtaining further clarity on its core business and on-going corporate strategies for PERDANA designed to derive potential synergies. Although a weaker performance in 4Q15 is expected due to the monsoon season, a better FY16 is in store as it benefits from the orderbook of RM4.1b and streamlining of its offshore vessel segment. Slowing work orders from Shell are likely to be partially countered by other projects in hand such as Facilities Improvement Project & EPCC for Bardegg & Baronia secured in June this year and recently renewed topside structural project from Petronas Carigali. Meanwhile, the company is looking to turn around PERDANA by improving its vessel utilisation through redeployment of vessels to their own projects and streamlining operations to lower operating expenses. We also gather that DAYANG is in the midst of refinancing its USD-denominated loan of USD150m by early next year to reduce its USD exposure in finance cost. All in, we maintain MARKET PERFORM for DAYANG with lower target price of RM1.43 (from RM1.67 previously), pegged to higher CY16 PER of 10.0x in view of better fleet management to complement its core business.

Recent business developments for DAYANG. HUC activities were slower with Shell compared to a year ago due to its downsizing measures and cost cutting in OPEX and CAPEX. Thus, we believe the weak performance would persist or even deteriorate in 4Q15 when entering the monsoon season. However, we gather that orders from Petronas Carigali remains firm with the renewal of topside structural maintenance job to Feb 2017 from Feb 2016. On top of that, the Facilities Improvement Project (FIP) contract (RM250m) and EPCC Bardegg-Baronia contract (RM280m) secured in June this year are currently in full-steam and we expect full-year contribution from this project in FY16, offsetting potential earnings weakness from Shell.

Aiming to turn around PERDANA. Taking full control in PERDANA, the management is undergoing several measures to turn around the company by bringing down its breakeven utilisation rate to 60+% from the current 70+% level. Hence, we are confident of the management’s capability to achieve the target given that DAYANG has a breakeven utilisation of below 50% before assuming vessels from PERDANA. To date, DAYANG has downsized the number of staffs in PERDANA to 50+ from 120+, including the top management of PERDANA. Coupled with other cost optimisation measures, we are expecting a cost saving of almost RM20m per annum starting from FY16.

Refinancing its USD denominated borrowings to reduce USD exposure. To recap, DAYANG subsumed a USD-denominated debt amounting to USD170m post consolidation of PERDANA. With the strengthening of USD, the company took a hit as all it revenue is denominated in local currency. Therefore, the company is in the midst of refinancing part of the debt through SUKUK amounting to RM650m by early next year. If things go well, DAYANG would be left with USD-denominated loan of USD20m and this could eventually reduce their finance cost assuming a lower rate is granted and its Shariah compliant status maintained.

Vessel redeployment to improve vessel utilisation. With an addition of 16 vessels post consolidation, DAYANG’s total vessels increased to 27 from 9, of which 8 vessels are chartered for internal projects and the remaining one chartered to an external client in Brunei. The company is looking to deploy more of its vessels for internal projects. This could help to improve PERDANA’s utilisation while lowering cost for its HUC and topside maintenance jobs.

Maintain MARKET PERFORM. In view of the weaker 4Q15, we cut our FY15E earnings by 10.1% to RM92.2m after factoring slower revenue contribution from HUC job from Shell but upgrade earnings in FY16E by 36.9% to RM125.2m with anticipation of a successful turnaround in its loss-making OSV segment through better vessel utilisation and lower operating expenses. Overall, the company’s fundamental remains solid albeit it is not entirely spared the overall industry slowdown. We maintain our MARKET PERFORM rating on the stock with lower TP of RM1.43 (RM1.67 previously) based on higher CY16 PER of 10.0x from 8.0x banking on better management in its newly subsumed vessels. We believe this valuation is justifiable given that it is still inline with its -1SD to its 5-year’s average Fwd. PER of 13.7x. Recall that we cut our FY16E earnings by 49.8% to RM91.5m on Monday during the results note piece with a target price of RM1.67 and putting it UNDER REVIEW pending a meeting with management Hence, this explains why our new target price is lower than the previous one despite an upward revision in earnings. Risks to call include: (i) slower-than-expected order book replenishment, and (ii) lower-thanexpected HUC margins. 

Source: Kenanga Research - 1 Dec 2015