3QFY20 staged a turnaround sequentially from losses last quarter, beating our expectation, thanks to recovery of offshore topside maintenance work orders. Moving forward, we believe this marks an indication of a recovery in activity level, although 4QFY20 may see a sequential dip given the monsoon season. Nonetheless, we upgrade the stock to OUTPERFORM, with TP of RM1.20, given the increased certainty of its recovery outlook going into FY21.

Slightly above our expectations. Amidst a sequential recovery from losses in 3QFY20, cumulative 9MFY20 came in slightly above our expectation, with its RM46.9m core net profit (arrived after adjusting for unrealised forex and net impairments on receivables) coming in at 87% of our full-year earnings forecast, due to stronger-than-anticipated recovery in its offshore topside maintenance services (TMS). However, the results are deemed to be below consensus at only 56%, possibly as market had anticipated a much stronger recovery. No dividends were announced, as expected.

Sequential recovery, but still weaker than last year. Sequentially, the 3QFY20 turnaround, from core net loss of RM1.6m to core net profit of RM34.8m, was mainly thanks to higher offshore TMS works (recall that last quarter, DAYANG saw significant disruption in operations given peak lockdown period). However, YoY, the core net profit was still weaker by 64%. The impact of low oil prices and Covid-19 pandemic have led to slowdowns in maintenance work orders being contracted, while vessel utilisation has also dropped to 62%, from 90%. Cumulatively, YTD-9MFY20 core net profit was also down by 68%, similarly as a result of delayed maintenance work orders. YTD vessel utilisation was also down to 56%, from 71% last year.

Recovery in play, but beware of monsoon in 4QFY20. We firmly believe that 4QFY20 may record sequentially weaker earnings amidst the monsoon season. That said, on the bigger picture, the healthy rebound recorded in 3QFY20 signals that a broader recovery of activity is on track heading to normalcy level as lockdown measures gradually eases. The group’s latest outstanding order-book of RM3.6b is expected to provide earnings’ visibility until at least FY23.

Upgrade to OUTPERFORM (from MARKET PERFORM), with unchanged TP of RM1.20, pegged to valuation of 0.8x FY21E PBV, which is roughly -1SD from mean. Post-results, we raised our FY20E/FY21E earnings by 15%/27% to account for stronger offshore TMS work orders.

Given the increased certainty in its recovery outlook going into FY21, as well as recent share price weakness, we upgraded our call to OUTPERFORM. Being an offshore contractor, we see DAYANG as a strong proxy towards any factors that may lead to improvements in oil demand (e.g. successful development of Covid-19 vaccination).

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

Source: Kenanga Research - 24 Nov 2020