DAYANG announced that it has won a landing craft tank contract from Sarawak Shell / Sabah Shell, with a contract duration of 548 days, plus a six months extension option. Overall, we are neutral on the contract win given its smallish value. No changes to our FY22-23F earnings, OUTPERFORM call, and TP of RM1.25.

Contract win from Shell. DAYANG announced that it has been awarded a contract for the provision of one unit Landing Craft Tank – Dayang Cempaka from Sarawak Shell Berhad / Sabah Shell Petroleum Company Limited. The duration of the contract is tentatively from 26 September 2022 with the approximate duration of 548 days, plus an extension option for six months. No values were disclosed, as the value of the contract will be based on work orders issued.

Our take on the contract win is as follows:

• Estimated contract value. Although contract value was not disclosed, based on the job scope, we estimate the value of the contract to be roughly RM4m in total – somewhat inconsequential to the group’s current total offshore maintenance of RM1.8b. Likewise, assuming 20% net margin from the job, our back-of-envelope calculations suggest earnings impact of ~RM0.5m per year (or <1% of our FY22- 23F).

Overall, we are largely neutral on the announcement given the smallish contract value having minimal impact to the group’s earnings and outlook.

Post update, we made no changes to our FY22-23F earnings.

PERDANA posted improved numbers. Meanwhile, a quick read through of DAYANG’s 63.7% subsidiary PERDANA’s reported 2QFY22 results saw improvement in numbers. The quarter managed to see reported net loss which shrunk by 83% YoY / 47% QoQ to RM14m, on the back of improved vessel utilisation of 60% (versus 51% in 2QFY21, and 30% in 1QFY22). As such, this gives us some comfort reiterating our view that DAYANG should similarly see better quarterly numbers ahead on the back of improved demand for offshore works. DAYANG is expected to post its upcoming 2QFY22 quarterly results within the month.

Maintain OUTPERFORM, with TP of RM1.25, pegged to 15x PER – which is at a 25% discount versus the average valuation of offshore maintenance peers back in 2014 (being the last year in which Brent crude was trading at above USD100/barrel, prior to the recent rally). A discount is applied versus valuations from the previous oil upcycle due to current business climate being much more demanding as clients currently are much more prudent in spending unlike the yesteryears. Note that our valuations have also taken into account our 3-star ESG rating applied onto the company.

Overall, we like DAYANG for its promising earnings recovery visible in the coming quarters – with it being a good play on the overall recovery of local oil and gas activity levels.

Risks to our call include: (i) a sharp decline in oil demand and prices if the global economy slips into a recession, (ii) non-renewal of licenses issued by oil majors, and (iii) the entrance of irrational new players.

Source: Kenanga Research - 17 Aug 2022