DAYANG?s FY16 results came below expectations dragged by weaker-than-expected margins due to stubbornly high fixed cost. That said, we still believe DAYANG is a potential beneficiary of the new round of contract awards given its track record within the space of maintenance work. Following FY17E earnings downgrade of 25%, we maintain our OUTPERFORM call with a lower target price of RM1.14 pegged to 0.75x FY17E PBV.

Below expectations. DAYANG recorded cumulative core net loss of RM3.5m in FY16, falling below our and street?s net profit forecasts of RM10.4m and RM27.3m, respectively. We believe this was largely due to weaker-than-expected margins dragged by stubbornly high fixed cost. No dividend was declared as expected.

Seasonally weaker performance. 4Q16 earnings dropped by half to RM9.4m from RM18.5m in 3Q16, after stripping off unrealised forex gain of RM41.4m and impairment on PPE of RM3.6m. The poorer performance was largely due to lower earnings contribution from its offshore TMS segment offsetting better performance from PERDANA. Note that PERDANA remained in the red with a core net loss of RM7.8m in 4Q16, improving slightly from RM9.3m loss in 3Q16 helped by best cost management despite weaker utilisation of 58% vs. 66% in 3Q16.

Stronger YoY performance. YoY-wise, its 4Q16 core net profit also fell 80% from RM46m in 4Q15 while top-line declined by 17% due to substantial fall in earnings by 69% from the TMS offshore segment in 4Q16 arising from stubbornly high fixed cost. Cumulatively, DAYANG still posted core net loss of RM3.5m in FY16, down from a core net profit of RM116.7m in FY15 as a result of weaker performance from largely from offshore TMS segment as well as full consolidation of highly-geared PERDANA which was still an associate in 1H15.

Earnings downgrade to account for weaker margins. In view of higher fixed cost pressuring margins, we cut our FY17E earnings by 25% to RM61.0m. FY18E earnings of RM68.0m is introduced assuming: (i) 7% improvement in top-line from offshore TMS segment backed by RM1.0b contract replenishment, and (ii) 65% vessel utilisation for PERDANA?s fleet.

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 (expected to be awarded 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.

Maintain OUTPERFORM. With better cash position, DAYANG?s net gearing improved to 1.1x from 1.2x in 3Q16. 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. Despite earnings cut, we maintain our OUTPERFORM call with a lower target price of RM1.14 from RM1.17 previously pegged to 0.75x FY17E PBV as we believe DAYANG is a potential beneficiary of fresh round of contract awards given its track record in maintenance work.

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

Source: Kenanga Research - 23 Feb 2017