We upgrade DAYANG to OUTPERFORM, with SoP-TP of RM2.00, on the premise of expected stronger quarterly earnings ahead, underpinned by increased number of work orders, on top of higher vessel utilisation. We believe current consensus estimates have yet to take into account the improved earnings outlook ahead, and hence, we still feel that there is more upside from current levels despite the strong share price’s performance in recent weeks.

Stronger quarters ahead? While DAYANG started the year with an underwhelming 1Q19 with core losses of RM5m, it managed to bounce back in 2Q19 by registering a core profit of RM53.5m – one of its best ever 2Q performances in years. Moving forward into 3Q19, we have reasons to believe that DAYANG could possibly post even stronger earnings, underpinned by increased number of work orders in topside maintenance, on top of higher vessel utilisation. This is in-line with Petronas’ guidance of a higher capex spend in 2H19, with focus on upstream oil and gas, jiving with the Petronas’ latest Activity Outlook. Looking at a longer-term view (i.e. beyond FY19), DAYANG could still benefit from higher decommissioning activities, while solid order-book (~RM3b) provides visibility for the next 2-3 years.

Debt restructuring still in the pipelines. To recap, DAYANG had earlier announced plans for its debt restructuring in May 2019, which entails (i) 1-for-10 rights issue, and (ii) proposed private placement of ~10% of total share capital. The company had recently concluded its required EGM earlier last week, with the rights issue on track to be concluded by end of 2019, although the proposed private placement could take up to 1Q20. Postrights, we believe DAYANG’s net-gearing could ease to ~0.6x, from 0.7x as at end-2Q19, leading to an interest cost savings of ~RM6-7m/year (based on an illustrative rights issue price of RM0.80).

OUTPERFORM with TP of RM2.00. Expecting strong earnings outlook ahead, especially for 3Q19, we raised our FY19E/FY20E earnings assumptions extensively by 35%/34%, after accounting for stronger topside maintenance contributions. Following this, our SoP-TP is also raised to RM2.00, from RM1.45 previously (fullydiluted basis), pegged to unchanged valuations of: (i) 16x PER on its topside maintenance segment, and (ii) 0.5x PBV on PERDANA. Our TP implies a forward PER of 16x, which is still slightly below oil and gas sector (excluding Petronas-related counters) average positive PER of 17x.

Hence, our call is also upgraded to OUTPERFORM (from UP previously). We believe consensus estimates (and our previous forecast) have failed to take into account stronger upcoming earnings. Catalyst could come from: (i) continued earnings growth delivery, and (ii) contract win announcements. Risks to our call include: (i) weaker-than-expected work orders, (ii) lower-thanexpected vessel utilisation, (iii) poorer-than-expected margins, and (iv) falling through of corporate exercises.

Source: Kenanga Research - 9 Oct 2019