KEY INVESTMENT HIGHLIGHTS

• Dayang’s reported a net loss of -RM1.0m in 2QFY20

• Loss recorded as a result of lower work orders received and performed during the quarter due to enforcement of MCO

• Vessel utilization dipped to 52% in 2QFY20 vs 81% in 2QFY19

• Current orderbook at RM3.8b as of August 2020

• FY21F earnings reduced by -10.5%

• Maintain NEUTRAL with a revised TP of RM1.27 per share

Dayang’s 2QFY20 earnings plunged by >100.0%yoy to - RM1.0m. Dayang Enterprise Holdings Berhad’s (Dayang) reported a loss of -RM1.0m in 2QFY20. This brings its 1HFY20 earnings to RM8.3m which was largely within our and consensus’ full-year earnings estimates. Despite only meeting <5.0% of our full-year earnings estimate; we deem the results in-line as we have anticipated a weak second quarter performance due to the enforcement of the movement control order (MCO) during the quarter which had restricted its operations and inflated its operating costs. The quarter’s performance was also exacerbated by lower vessel utilization of 52% vs 81% in 2QFY19. This had resulted in its revenue plunging by -30.8%yoy whilst its earnings dipped by >100%yoy. Meanwhile on a quarterly sequential basis; revenue was comparable to 1QFY20 whilst earnings dipped by >100.0%qoq.

Perdana Petroleum reported a normalized loss of -RM2.579m.

Perdana Petroleum’s reported a net loss of -RM2.879m in 2QFY20. However, its normalized loss excluding net unrealized forex loss of RM0.3m came in at -RM2.579m which is >100.0% higher year-overyear. This was mainly attributable to lower vessel utilization rate during the quarter at 52% vs 81% in 2QFY19. The lower vessel utilization is as a result of delayed work and contracts awarded by oil majors following the outbreak of the Covid-19.

Better 2HFY20 expected. While Dayang’s performance was greatly affected in the second quarter of FY20 however, this was already anticipated following the implementation of MCO in 1QFY20. That said, we opine that Dayang will recover in the second half of FY20 give that: (i) business operations has fully-resumed from May 2020 onwards; (ii) crude oil price has remained stable between USD40-45pb since July and; (iii) gradual return in demand for crude and crude-related products which will drive the offshore activities in the second half of FY20.

Orderbook amounts to RM3.8b as of 21 August 2020. Dayang’s orderbook as at 21st August 2020 amounts to RM3.8b (vs RM4.0b in June 2020) and this is expected to last Dayang until 2025. This is inclusive of the recent contract awarded by Sarawak Shell Berhad (SSB)and Sabah Shell Petroleum Company Limited (SSPC) for the provision of Topside Major Maintenance Services for SSB and SSPC. The contract value is estimated to be at about circa RM10.0m and is effective from 23rd July 2020 until end-2020.

Earnings impact. While we do not doubt that Dayang will stage a recovery in the second half of FY20 given that not only demand for crude petroleum and its related products are coming back onstream as a result of the easing of Covid-19 measures worldwide but second half is also typically, Dayang’s strongest period. However, the recovery in demand is expected to be gradual given that newly infected cases of Covid-19 remains elevated in countries where 60% of the world’s crude petroleum demand is coming from which could stunt demand recovery. This, in return is expected to impact work orders received and performed going into 2021. Hence, we are reducing Dayang’s FY21F earnings estimates by - 10.5% as we are expecting gradual recovery in work orders to be received.

Maintain NEUTRAL with a revised TP of RM1.27. All things considered; we are maintaining our NEUTRAL recommendation on Dayang with a revised target price of RM1.27 (from RM1.42 per share previously). Our TP is premised on a revised PER21 of 6.1x pegged to EPS21 of 20.8sen. Our revised target PER is based on the average of Dayang’s 5-year historical PER. We opine that this is fair given that: (i) all the positives have been priced in at this juncture; (ii) challenging operating environment for most oil and gas players following the global spread of Covid-19 which has stunted demand for crude oil and crude oil derivatives as well as; (iii) the oil price war that has resulted in the weakening of the oil price.

That said, we expect Dayang to emerge from the current volatile operating environment successfully given its: (i) improving profit margins on work orders; (ii) improving vessel utilization and financials by Perdana Petroleum and; (iii) strong and proven track record as one of the leading MCM service provider which we opine, will ensure a stable earnings trajectory for Dayang in FY20.

Source: MIDF Research - 24 Aug 2020