INVESTMENT HIGHLIGHTS

• Dayang Enterprise 1QFY18 normalised earnings excluding unrealised forex losses very encouraging at +RM8.1m

• Reported earnings however in the red

• Revenue increased +26%yoy premised on higher work orders

• Reiterate BUY with unchanged target price of RM1.06 per share

Normalised earnings encouraging. Dayang reported 1QFY18 losses of -RM21.3m. However, excluding unrealised forex losses, Dayang posted an encouraging normalised earnings of +RM8.1m. The commendable earnings is premised on upbeat revenue of RM148.8m, representing an increase of +26.2%yoy. The surge in sales is largely attributable to higher work orders received and performed under the topside maintenance services. We are pleasantly surprised by the commendable normalised earnings as we expected 1QFY18 results to be negatively affected by Perdana Petroleum Berhad. Nonetheless, we remain optimistic and maintain our expectations of stronger 2QFY18 and 3QFY18. Our expectation is based on strong activity levels until October 2018.

Perdana still work-in-progress. Dayang's profitability from the engineering segments (PBT: +RM43.3m) has been hampered by Perdana Petroleum Berhad (LBT: -RM68.0m) as the latter's fleet utilisation rate is low at 27%. In addition, the reported earnings is impacted by unrealised forex losses from its borrowings.

Current jobs at hand. The company guided that activity levels for the Maintenance, Construction and Modifications Contract (MCM) and Topside Maintenance Services works under the Pan Hook-up and Commissioning Contract (Pan HUC) improved in 1QFY18 despite the typical cyclical monsoon months. The company's current orderbook stands at approximately RM2b lasting through to 2022.

Tenderbook. The company has participated in approximately RM8b worth of projects, in particular the Pan MCM tenders. The company remains fairly confident of winning a portion given its track record and successful campaigns in similar projects.

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 upcycle to start in 2QFY18. From the offshore activity levels that are currently taking place, we believe that the earnings upcycle for Dayang could start as early as 2QFY18.

Reiterate BUY. We are reiterating our BUY recommendation on Dayang with an unchanged TP of RM1.06 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 14x pegged to EPS18 of 7.6sen. Our target PER is based on the company’s two-year historical average PER.

Recent share price retreat presents buying opportunity. The recent sell down in share price this week presents buying opportunity. We believe that: (i) company fundamentals remain intact; (ii) clear direction of management to reduce gearing and to rejuvenate Perdana Petroleum and; (iii) high orderbook quality obtained through track record and company merits.

Source: MIDF Research - 25 May 2018