The proposed placement, in our view, is essential to DAYANG for better capital management, lowering its net gearing position and alleviating near-term financial burden. Adjusting FY17-18E earnings upward by 5%-8% for lower interest cost. All in, we maintain OUTPEROFRM call on the stock with unchanged TP of RM1.14 pegged to 0.77x FY17 PBV as we believe DAYANG is a potential beneficiary of fresh round of contract awards given its track record in maintenance work.

Proposed placement. Last Friday, DAYANG announced that the company proposes to undertake a private placement of up to 10% of the total number of issued shares. The private placement will result in 87.7m new shares being raised; enlarging the share capital to 964.8m shares. The exercise is expected to be completed by 2Q17.

For debt repayment. We were not surprised by the announcement as management has previously guided its intention to pare down its debt. Despite being EPS dilutive, we believe this is essential and positive to DAYANG to have better capital management by lowering its financial risk. Assuming an indicative placement price of RM1.00, which is at 3.8% discount to the last traded price and 6.2% discount to 5-day weighted average market price (WAMP) up to 23 Feb 2017 (as stated in the announcement), DAYANG will raise RM87.7m for repayment of borrowings within six months. Subsequently, DAYANG?s net gearing will drop to 1.14x from 1.29x as of 4Q16.

Conditional pending Bursa Securities approval. The proposal is conditional pending approval of Bursa Securities and does not require specific approval in the upcoming AGM as the shareholders of DAYANG had passed a resolution at its last annual general meeting convened on 25 May 2016 authorising the Board to issue new shares not exceeding 10% of the total number of issued shares.

Earnings up accounted for lower interest expense. We have adjusted our FY17-18E earnings upward by 5-8% after accounting for savings cost saving from the settlement of partial debt via placement proceeds assuming placement price is set at RM1.00.

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 being the incumbent for the Sarawak topside maintenance contract.

Maintain OUTPERFORM. Post earnings adjustment and assuming higher share base, we maintain our OUTPERFORM call with an unchanged target price of RM1.14 pegged to slightly higher 0.77x (from 0.75x previously) FY17E PBV in view larger equity base rendering lower financial risk. Overall, 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 - 27 Feb 2017