INVESTMENT HIGHLIGHTS

• Dayang Enterprise Holdings Bhd’s (Dayang) earnings upcycle to start as early as 2QFY18

• Perdana Petroleum could possibly see turnaround in FY18

• Activity levels currently in high gear owing to robust MCM works despite seasonal monsoon season

• Current orderbook in excess of RM3.4b

• Reiterate BUY with upgraded TP of RM0.95 per share

Exciting year ahead. Following high activity levels in 3QFY17, the company reported commendable 3QFY17 normalised earnings of RM9.5m last month. Although 4QFY17 is typically seasonally slower due to the seasonal monsoon season, but we understand that offshore activity levels are remaining at elevated levels compared with that of yesteryears. This is largely owing to the aggressive work callouts by Petronas and its PSCs.

Strong fleet utilisation rate. Currently, the company’s utilisation rate (UR) of its 25 (of which 17 from Perdana Petroleum) offshore support vessels are improving. UR for 3QFY17 was above 75% (higher than regional average) compared to only 44% in 2QFY17. Average fleet UR for FY17 now stands at 53%. As for Perdana Petroleum (unrated) by itself, the company’s current fleet UR (half of which are to be chartered to Dayang’s MCM campaigns) average approximately 55%. Moving into 2018, Perdana’s fleet UR is expected to increase to between 70-80%. Our assumption is guided by Petronas’ Activity Outlook Report 2017-2019.

Current orderbook. Dayang’s current orderbook stands at a robust RM3.415b, with long term contracts ranging from two to five years. (refer to table below).

Tenderbook. The company is also in the midst of increasing its orderbook, currently participating in RM8b worth of tenders.

Dayang’s forte. Dayang is no stranger to Petronas’ maintenance, construction and modification (MCM) works as it was the incumbent for the previous HUC contracts from 2013. Currently, Dayang on its own has: (i) 6 work vessels and; (ii) 2 supply boats with an average age of approximately 6.5 years old. All of which are fit for purpose, within the stringent specifications required by Petronas and its production sharing contractors.

Earnings to stage massive leap. Taking into consideration (i) work orders for Dayang’s MCM portion; (ii) Petronas’ activity outlook for 2017-2019; (iii) Strong utilisation rate for both Dayang and Perdana’s vessels and; (iii) Perdana Petroleum’s potential turnaround in 2018, we believe that FY18 will record strong revenue, possibly matching that of FY14 along with strong year-over-year profit.

Earnings upcycle to start in 2QFY18. We were previously expecting the earnings upcycle to only start in the latter part of FY18. However, from the offshore activity levels that are currently taking place, we believe that the earnings upcycle for Dayang could start as early as 2QFY18.

Impact on earnings. Based on the abovementioned earnings boosters, we are increasing our earnings forecasts for FY18 by +22.1% to RM73.4m.

Reiterate BUY. We are reiterating our BUY recommendation on Dayang with an upgraded TP of RM0.95 per share. Our BUY recommendation is premised on: (i) Large potential share price upside; (ii) Earnings up-cycle in FY18; (iii) Improving operating climate with higher activity levels and improving UR and; (iv) Improving conditions for Perdana Petroleum. Our valuation is premised on PER18 of 12.5x pegged to EPS18 of 7.6sen. Our target price is still biased towards the conservative end (offering further re-rating opportunities), based on a 0.5-standard deviation discount to the company’s five-year average rolling PER of 15x.

Source: MIDF Research - 22 Dec 2017