1Q16 net loss of RM26.4m is unexpected on less work performed and loss-making subsidiary, PERDANA. We believe work orders will pick up in the next two quarters, but earnings risk remains. In view of persistent timing risk on its call out contracts, we trimmed FY16E/FY17E earnings by 73%/34%. Hence, downgrade to UNDERPERFORM with lower TP of RM0.93 pegged to 10.0x CY17 PER.

Below expectations. DAYANG recorded unexpected core net loss (CNL) of RM26.4m in 1Q16. This is below our and street’s net profit forecasts of RM125.2 and RM114.9m, respectively. We believe this was largely due to weaker-than-expected HUC recognition. No dividend was declared as expected.

Performance dropped both YoY & QoQ. 1Q16 sank into a CNL of RM26.4m from a profit of RM34.4m a year ago, dragged by weaker HUC work as well as its loss-making subsidiary, PERDANA (which was still an associate in 1Q15). Note that offshore segment’s revenue plunged by 55% YoY as most topside major maintenance (TMM) and Hook-up and Commissioning (HUC) contracts were carried out on a much slower-than-expected pace. PERDANA also recorded a bigger CNL of RM13.6m in 1Q16 from a core net profit of RM6.0m in 1Q15 due to weaker utilisation (51% vs 76% in 1Q15). On QoQ basis, 1Q16 core net profit also dipped into red from a profit of RM46.0m in the previous quarter due to the abovementioned reasons but partially offset by lower finance cost. Its OSV segment topline dwindled 30% caused by weakening of PERDANA’s vessel utilisation from 59% in 4Q15 while project deferral in its traditional bread and butter business resulted in a 50% plunge in offshore topside maintenance services division.

Keen to maintain PERDANA’s listing status. DAYANG is in talks with interested parties to pare down at least 25% stake in PERDANA to maintain the latter’s listing status. The company had submitted an application for a further six-month extension for compliance with the public shareholding spread to 12 August 2016, which was approved by Bursa Securities on 1st April.

Shariah-compliant Status is likely to maintain. PERDANA completed its first issuance of Sukuk Murabahah worth RM650m of which RM615m is used to refinance its outstanding borrowings last month. Therefore, DAYANG should be able to stay within the Shariah-compliant list which is releasing by the end of this month.

Earnings downgrade to account for lower work orders. In view of the weaker operating environment, we cut our FY16E/FY17E earnings by 73%/34% to RM33.4m/RM81.1m after factoring slower revenue contribution from HUC work orders and lower PERDANA’s vessel utilisation to 55%/65 from 65%/70% for FY16E/FY17E.

Downgrade to UNDERPERFORM. Post changes in forecast and rolling forward our valuation base year to CY17, target price is reduced to RM0.93 from RM1.43 previously. Hence, we downgrade DAYANG to UNDERPERFORM as timing risks are still present for its HUC projects, which account for a significant portion of the group’s revenue as its oil majors clients seek to defer contracts partially to later years in lieu of uncertainty in crude oil prices. Risks to our call: (i) Stronger than expected HUC work orders, and (ii) upturn in OSV market.

Source: Kenanga Research - 26 May 2016