DAYANG posted record profit in FY19, beating expectations, thanks to higher work orders received for its offshore TMS, as well as higher vessel utilisations for its marine charter. Moving forward, Petronas is still looking to increase its demand for MCM and marine vessels – both of which will benefit DAYANG. Additionally, reduced debt following the conclusion of its debt restructuring and improving earnings could also lead to further finance cost savings. Upgrade call to OP and TP to RM3.40.

FY19 above expectations. DAYANG posted FY19 core net profit of RM215.1m (arrived after stripping-off non-core items e.g. unrealised forex, gain on purchases, and reversal of accrued interests) – coming above our forecasts by 26%, and consensus by 5%, thanks to higher work orders for its offshore TMS, and stronger vessel utilisation in its marine charter division. No dividends were announced, as expected.

Seasonally weaker quarter. 4QFY19 core net profit came in at RM70.5m, coming in weaker QoQ by 27% – which is largely expected given that 4Q has generally been a seasonally weak quarter. This was reflected by the decline in revenue (by 20%), dragged by less work orders in its offshore TMS, as well as poorer utilisation (74% vs 91%) for its marine charter. YoY, core net profit also came in poorer by 25%, despite revenue and gross profits staying somewhat flattish. This was due to debt restructuring expenses, coupled with a deferred tax expense arising from utilisation of unabsorbed capital allowances. Also note that 4QFY18 benefitted from a realised forex gain of RM15.4m (which we usually treat as part of core earnings). Cumulatively, FY19 core net profit jumped 31% on the back of higher-value jobs for its offshore TMS, thereby leading to higher margins, as well as stronger vessel utilisation for its marine charter (70% vs 64%).

Still expecting earnings growth. Moving forward, we are still expecting DAYANG to continue posting positive earnings growth going into FY20-21 even after the exceptionally strong FY19A. In its latest activity outlook, Petronas has guided for a further increase in demand for maintenance, construction and modification (MCM), as well as marine vessels – both of which are segments that will benefit DAYANG. Additionally, on the back of its outlook recovery and recently-concluded debt restructuring, DAYANG saw its total debt reduced by 25% (or RM277m) YoY, which would result in further finance costs savings.

Upgrade to OUTPERFORM (from MARKET PERFORM), with higher TP of RM3.40 (from SoP-TP of RM2.75 previously), based on 14x FY21E PER, which is a notch higher than its 12-month average PER of 13x, but still below oil and gas sector’s average of 19x. Post-results, we also raised our FY20E CNP by 11%, after factoring in stronger work orders and vessel utilisations, while introducing new FY21E numbers. Further catalyst could still come from further contract wins (which we have yet to price in) as well as further positive earnings surprise.

Risks to our call are: (i) weaker-than-expected work orders, (ii) poorer-than-expected margins, and (iii) lower-than-expected vessel utilisation.

Source: Kenanga Research - 24 Feb 2020