Following a meeting with DAYANG’s management yesterday, we are feeling more assured that the company is on track to recovery, for both its OSV and TMS segments. All in, we maintain our OUTPERFORM call with an unchanged target price of RM1.17 pegged to 0.8x FY17E PBV as we believe DAYANG is a potential beneficiary of fresh round of contract awards given its track record in maintenance work.

Aiming at Petronas marine vessels contracts. DAYANG is targeting to improve PERDANA’s 17 vessels utilisation to an average of 70% - a breakeven level from 60% in FY16. Currently, the company is bidding for Petronas’ new round of marine vessels contracts, which include several short-to-medium-term jobs. Given that it is an umbrella contract, Petronas might shortlist 5-6 licensed players who qualified for technical specifications. Time line of work orders and charter rates are not explicitly laid out, but we expect the contract to be awarded by 1Q17.

Potential beneficiaries of MCM contract. As for its bread and butter business, we believe DAYANG is well positioned to be one of the potential beneficiaries of Petronas’ 5-year maintenance, construction and modification (MCM) contract (to be awarded latest by 2Q17) estimated at RM5.0-6.0b. We gather that the contract is split into 6 packages and the Sarawak’s MCM portion is the biggest pie estimated at RM1.5b. We believe DAYANG stands a good chance to win this portion given that it is the incumbent for the Sarawak topside maintenance contract. Recall that DAYANG won the RM800m topside maintenance services contract from Petronas but total revenue recognised was widened to RM1.4b due to additional work scope allocated.

In need to lower gearing level. As of 3Q16, DAYANG’s net gearing stood at 1.2x, comprising RM1.7b of total borrowings and RM227.6m of cash and bank balances. Management is planning to dispose 1-2 vessels to raise more cash. However, it could be challenging, in our view, to obtain attractive resale value and DAYANG might need to sell these assets at a slight loss. On the other hand, we do not discount the possibility of new shares placement up to 10% of its existing share capital to repay borrowings. No changes to our FY16-17E numbers as we believe DAYANG should be able to secure more contracts in the near-term resulting in sustainable work orders.

Maintain OUTPERFORM. Currently, DAYANG is extending its application for compliance with the public shareholding spread to maintain PERDANA (Not-Rated)’s listing status. Failing to do so, DAYANG is likely to privatise PERDANA. We do not foresee significant impairment on its fleets in upcoming 4Q16 results announcement (in February) but expect a write-off of USD8.4m (c. RM37.8m) relating to 20% deposit of the 500-men accommodation work barge, SK317 placed to Nam Cheong International Ltd. All in, we maintain OUTPERFORM call on the stock with an unchanged target price of RM1.17 pegged to 0.8x FY17E PBV as we believe DAYANG is a potential beneficiary of the new round of contract awards given its track record within the space of maintenance work.

Risks to our call: (i) weaker-than-expected HUC/TMM work orders, and (ii) prolonged downturn in OSV market.

Source: Kenanga Research - 19 Jan 2017