FY17 results surpassed our expectations on better cost control but disappointed the street’s possibly on weaker marine segment. With the anticipation of improving outlook in both its core businesses, we upgraded FY18E earnings by 12% and our SoP-driven TP to RM0.960 from RM0.730 on higher valuations. Still an OP premising on earnings recovery in FY18E and better contract flow.

Surpassed our expectations but disappointed consensus. At only 34% of our core net losses (CNL) estimates, FY17 results surpassed our expectations due to lower-than-expected operating expenses. However, it fell below the street’s expectation of RM16.1m profit, and we suspect the weaker-than-expected marine segment was the culprit of negative deviation. No dividend was declared as expected.

4Q17 earnings down both QoQ and YoY. 4Q17 earnings dropped 75% QoQ to RM2.7m after stripping off unrealised forex loss of RM21.5m, RM17.4m reversal of impairment, and RM52.8m deferred tax expenses. The poorer performance was largely attributable to seasonally weaker TMS division (-42%) and marine charter business (RM25.7m operating losses from RM10m profit in 3Q17). Note that its 61%-owned PERDANA (Not Rated) recorded lower vessel utilisation at 51% in 4Q17 vs. 70% in 3Q17. YoY, 4Q17 bottom-line also fell by 71%, no thanks to weaker marine charter segment led by lower rates and vessel utilisation (58% in 4Q16) masked stronger offshore TMS division (+32%; better operating efficiency). Cumulatively, its core net loss widened by 34% to RM4.7m due to the similar reasons as mentioned above.

Upgraded FY18E earnings by 12%. We upgrade FY18E earnings by 12% to RM66.7m factoring higher FY18E order-book replenishment of RM800m (from RM500m previously) in view of better contract flow for maintenance work. Meanwhile, FY19E earnings of RM75.9m (+14% YoY) is introduced assuming: (i) RM800m order-book replenishment, and (ii) 60% vessel utilisation.

Improving outlook. Following Petronas’ +33%/25% revision of FY18E HUC/MCM activities in its latest activities outlook report last December, we should be expecting stable and consistent HUC/MCM demand in the long run backed by aging platforms in brownfields although such activities are c.50% lower than its peak activity level in 2013-14. Meanwhile, we believe the worst could be over for the OSV segment with higher activities anticipated despite DCRs likely to stay flattish by prioritising utilisation.

Maintain OUTPERFORM with higher TP. As of 4Q17, DAYANG has not met certain covenants of three term loans and the Sukuk bond totalling RM601.6m resulting in its non-current portions (RM473.1m) to be reclassified to current liabilities. We understand that management is in the midst of discussion with the financial institutions without immediate default risk in sight. Post earnings adjustment, we upgraded our TP to RM0.960 (implying FY18E PER of 14x and 0.9x PBV) from RM0.730 previously following our upgrade of; (i) OSV segment to 0.6x FY18E PBV (from 0.4x), and (ii) offshore TMS segment to 11x FY18E PER (from 10x previously) on better prospects outlook. All in, we reiterate our OUTPERFORM call on the counter premising on earnings recovery in FY18 given its track record within the space of maintenance work. Risks to our call are: (i) weaker-than-expected HUC/TMM work orders, and (ii) prolonged downturn in OSV market.

Source: Kenanga Research - 26 Feb 2018