DAYANG’s 9M16 results still came below expectations despite both OSV and TMS segments posting stronger performance in 3Q16. That said, given that the share price had fallen 35% YTD, suggesting the negatives could have been priced in, we upgrade the stock to MARKET PERFORM call with unchanged TP of RM0.93 pegged to 10.0x CY17 PER in view of being one of the beneficiaries for new round of contract awards.

Below expectations. DAYANG recorded cumulative core net loss of RM12.9m in 9M16, falling below our and street’s net profit forecasts of RM16.9m and RM30.5m, respectively. We believe this was largely due to weaker-than-expected HUC recognition. No dividend was declared as expected.

QoQ Improvement seen in 3Q16. DAYANG managed to climb back to core net profit of RM18.5m from a core net loss of RM6.6m in 2Q16, after stripping off unrealised forex gain of RM17.7m. The better performance was largely due to stronger HUC work performed and better OSV fleet utilisation. PERDANA managed to narrow its CNL to RM9.4m from RM32.7m in 2Q16 arising from better utilisation of 66% vs. 56% in 2Q15.

Stronger YoY performance. YoY-wise, its 3Q16 core net profit surged from RM0.9m in 3Q15 due to better performance of its 95% owned subsidiary, PERDANA, evident by an improvement in vessel utilisation to 66% from 55% in 3Q15 coupled with better contribution from its core business. Note that offshore topside maintenance segment (TMS) recorded stronger performance in 3Q16 (+54.7% YoY, 9.9% QoQ), suggesting that activities level has continued to pick up with better margins (+8.0%YoY, +1.9% QoQ). However, cumulatively, DAYANG still posted core net loss of RM12.9m in 9M16, down from a core net profit of RM70.7m in 9M15 as a result of weaker performance from both offshore TMS and marine charter business in 1H16 as well as full consolidation of highly-geared PERDANA which was still an associate in 1H15.

Earnings downgrade to account for lower work orders. In view of the weaker operating environment, we cut our FY16E earnings by 39% to RM10.4m after factoring slower revenue contribution from HUC work orders. No changes to our FY17E numbers as we believe DAYANG should be able to secure more contracts in the near-term resulting in sustainable work orders.

Upgrade to MARKET PERFORM. The share price has fallen 35% YTD suggesting that the negatives could have been priced in. As such, we upgrade our call to MARKET PERFORM with an unchanged TP of RM0.93 pegged to 10x CY17 PER in view of DAYANG being one of the beneficiaries for new round of contract awards. Risks to our call: (i) weaker-than-expected HUC/TMM work orders, and (ii) prolonged downturn in OSV market.

Source: Kenanga Research - 23 Nov 2016