While we had anticipated 1Q19 to be a weaker quarter, the loss caused by poorer topside maintenance was a surprise. Nonetheless, as 1Q has typically been a seasonally weak quarter, we expect some recovery in the remainder of the year. Meanwhile, the much-expected debt restructuring was finally announced earlier in the week, and is expected to be finalised by 4Q19. Maintain UNDERPERFORM call with a revised TP of RM0.80.

Unexpected losses. DAYANG recorded 1Q19 core loss of RM5.2m (after adjusting for unrealised forex gains), against our and consensus full-year earnings forecasts of RM106.1m and RM116.8m, respectively, dragged by poorer-than-expected offshore topside maintenance services (TMS). While we had anticipated the quarter to post sequentially weaker numbers given last quarter’s high lump-sum work orders, we, however, were not expecting a loss. No dividends were declared, as expected.

Dragged by poorer offshore TMS. YoY, 1Q19 plunged into losses from core profit of RM8.1m in 1Q18 (after adjusting for unrealised forex losses), dragged by the poorer offshore TMS segment, due to: (i) lower revenue given less schedule of rates work orders, on top of (ii) deteriorated operating margins. This was partially offset by a slightly better performance from its marine charter, which saw utilisation rate improving to 36% from 27% last year. Sequentially, 1Q19 deteriorated massively into losses from an exceptional quarter in 4Q18, as last quarter saw unusually high lumpsum work orders despite the monsoon season. Operating profit for offshore TMS deteriorated 70% QoQ, while marine charter plunged into the red on the back of lower utilisation rate at 36%, versus 73% in 4Q18.

Debt restructuring to be completed by 4Q19. The company had finally proposed its much-anticipated debt restructuring earlier this week, entailing; (i) a 1-for-10 rights issue, (ii) private placement of up to 10% of total issued shares, (iii) issuance of Sukuk of RM682.5m and subscription of PERDANA’s RCPS (refer to our report dated 21 May 2019 for further details). Overall, this is expected to reduce DAYANG’s net gearing to 0.66x (from 0.72x currently), as well as diluting its share base by ~20%. The exercises are expected to be completed by 4Q19, pending shareholders and authorities’ approvals. Meanwhile, as 1Q is seasonally a weaker quarter, we are expecting up-coming quarters to see some improvement in numbers, backed by its order-book of ~RM3b.

Maintain UNDERPERFORM, from a possible sentiment overhang given share dilution arising from the fund-raising exercises, coupled with the under-whelming results. Post-results, we trimmed our FY19- 20E earnings forecasts by 12-8% after lowering our offshore TMS revenue and margins assumptions. Our SoP-TP is also lowered to RM0.80 (from RM1.05 previously) after revaluing its offshore TMS at 9x PER (from 12x) on the back of the unexpected losses – in-line with valuations of selective offshore peers (e.g. DELEUM, PETRA) operating within the similar space. Our TP implies forward PBV of 0.7x (in-line with -0.5SD from its mean) and PER of 8x. Since our “takeprofit” UNDERPERFORM call in March, the stock has retraced 47%.

Overall, our calls on DAYANG for the past twelve months had yielded returns of over 185% (includes both OUTPERFORM and UNDERPERFORM calls).

Risks to our call are: (i) stronger-than-expected work orders, (ii) increase in lump sum orders, (iii) higher-than-expected vessel utilisation, and (iv) falling through of corporate exercises.

Source: Kenanga Research - 24 May 2019