Overall, DAYANG’s 1H16 results still came below expectations despite a strong pick-up in its core offshore TMS segment in 2Q16. Given that DAYANG has made tremendous effort to turn around PERDANA, we do not discount the possibility of a fully privatised PERDANA for long-term synergy. We maintain our UNDERPERFORM call with unchanged TP of RM0.93 pegged to 10.0x CY17 PER due to oversupply in OSV space.

Below expectations. DAYANG recorded cumulative core net loss of RM18.1m in 1H16, falling below our and street’s net profit forecasts of RM33.4m and RM54.5m, respectively. We believe this was largely due to weaker-than-expected HUC recognition. No dividend was declared as expected.

QoQ Improvement seen in 2Q16. DAYANG managed to climb back to core net profit of RM8.2m from a core net loss of RM26.4m in 1Q16, after stripping off one-off items including: (i) additional tax charge of RM7.0m from past years post tax audit, (ii) one-off breakfund costs of RM11.3m incurred for settlement of term loans of 12 vessels, and (iii) reversal of impairment of RM8.0m. The better performance was largely due to stronger HUC work performed post monsoon season and better OSV fleet utilisation. PERDANA managed to narrow its CNL to RM8.5m from RM13.6m in 1Q16 arising from better utilisation of 56% vs. 51% in 1Q15.

YoY still down. YoY-wise, its 2Q16 core net profit still plunged 77% from RM35.4m in 2Q15, mainly attributable to its loss-making subsidiary, PERDANA (which was still an associate in 2Q15), evident by a drop in vessel utilisation to 56% from 68% in 2Q15. However, it was offset by better HUC work performed. Note that offshore topside maintenance segment (TMS) recorded stellar performance in 2Q16 (+5.3% YoYm, 98.3% QoQ), suggesting that the activities level had resumed substantially. Cumulatively, DAYANG still posted core net loss of RM18.1m in 1H16, down from a core net profit of RM69.7m in 1H15 as a result of poor performance from both offshore TMS and marine charter business as well as higher finance cost due to consolidation of highly-geared PERDANA.

Potential privatisation of PERDANA? The company had submitted an application for a further three-month extension for compliance with the public shareholding spread to 12 November 2016, Failing to do so, DAYANG is likely to privatise PERDANA.

Earnings downgrade to account for lower work orders. In view of the weaker operating environment, we cut our FY16E earnings by 50% to RM16.9m after factoring slower revenue contribution from HUC work orders. No changes to our FY17E as we believe its opex related work orders are likely to pick up at a faster pace than this year.

Maintain UNDERPERFORM. DAYANG managed to reduce its near cash flow pressure post issuance of sukuk to pay back its term loan. However, we still maintain our UNDERPERFORM call with an unchanged TP RM0.93 pegged to 10x CY17 PER as the OSV segment might pull back the overall performance of the company in the short-term.

Risks to our call: (i) stronger-than-expected HUC work orders, and (ii) upturn in OSV market.

Source: Kenanga Research - 25 Aug 2016