We  attended  a  briefing  on  Dayang  Enterprise  and  are  positive  on  the company’s  proposed  private  placement.  We  keep  our  BUY  call  and MYR4.80 FV, pegged to a 16x FY15F P/E.  The cash to be  raised  may be used  to  either:  i)  raise  its  stake  in  Perdana  Petroleum,  ii)  ramp  up capacity in anticipation of major EPCC contracts, or iii)  buy  deepwatercapable marine assets. Dayang remains one of our top O&G picks.

Details of placement.  Dayang is proposing a 10% private placement of up to 82.5m new shares  that will raise an  estimated  MYR304m in  gross proceeds,  based  on  an  indicative  price  of  MYR3.69  per  share.  Post placement,  Dayang –  whose gearing is currently at 0.2x  –  will end up ina net cash position. The company’s orderbook now stands at MYR4.7bn.

Three  possible  scenarios.  Dayang,  which  currently  holds  24.5%  of Perdana Petroleum (Perdana) (PETR MK, BUY, FV: MYR2.20), may use the proceeds to increase its stake in the latter. It may potentially raise its stake  in  Perdana  up  to  the  general  offer  threshold  (33%).  Secondly,  it may  ramp  up  its  capacity  in  anticipation  of  engineering,  procurement, construction  and  commissioning  (EPCC)  jobs.  We  understand  that Dayang is currently bidding for MYR800m worth of such contracts, which will  require  it  to  expand  the  acreage  at  its  fabrication  yard  as  well  as address the issue of  engineering design capability.  Another possibility is it may utilise the proceeds to acquire  deepwater-capable marine assets,which requires heavy capex.  

Maintain  BUY  and  MYR4.80  FV.  Our   FV  is  pegged  to  a  16x  FY15F P/E,  at  a  slight  premium  to  small  to  midcap   oil   and   gas  (O&G)companies’   P/E   of   15x,   supported   by   a  45%   2-year  forward earnings  CAGR.  We  maintain  our  BUY  recommendation  and  our MYR4.80  FV,  although  we  note  that  this  will  adjust  to  MYR4.36  on completion  of  the  placement.  We  are  positive  on  this  cash-raising exercise  as  it  can  potentially  open  up  more  avenues  and  investment opportunities for Dayang.

Key Highlights

Raising  stake  in  Perdana  Petroleum.  The  proceeds  could  be  used  to  increase Dayang’s stake in Perdana, in which the former  currently holds 24.5%. We believe this potential stake increase will be positive for both companies as there are potential synergistic opportunitiess. Dayang currently utilises  seven  of Perdana’s vessels for its hook-up, construction and commissioning (HuCC) work. Perdana’s  fleet of young and modern vessels  will allow  it  to easily meet the stringent vessel requirements in the near to mid-term.

Valuation.  If  Dayang  were  to  increase  its  stake  to  close  to  the  33%  general  offer threshold  from  24.5%  currently,  this  will  increase  its  earnings  by  2.8%/2.6%  for FY15/FY16 respectively. Our fully-diluted FV ex-placement of MYR4.36  will adjust  to MYR4.55  as  we  take  into  account  the  potential  earnings  accretion  from  a  higher stake in Perdana. 

Building up its EPCC muscle. The company may also use the placement proceeds to ramp up capacity in anticipation of new EPCC jobs. We understand that Dayang is currently bidding for MYR800m worth of EPCC contracts and believe  that it  stands a good chance  of winning those  contracts as it has  already  proven itself to be more than capable  of  undertaking HuCC/topside structural  maintenance (TSM)  jobs for oil majors.  Hence, taking on EPCC  jobs  is the  next  logical step as the company moves higher up the value chain from HuCC jobs. Prior to this,  Dayang had been unable to take on the engineering portion of EPCC contracts  as  it did  not have the manpower nor the capability, but we believe the fund-raising exercise will more than address the shortage.  We believe the company will also use the proceeds to acquire more yard space as EPCC jobs require bigger fabrication yards.

Deepwater marine assets. The company is also considering  to  utilise  the proceeds to  acquire  deepwater-capable  marine  assets.  Dayang  is  foreseeing  more  jobs  to serve  deepwater  exploration  and  production.  A  deepwater-capable  vessel  with dynamic  positioning  would  cost  them  about  MYR150m  as  deepwater  works  would require a higher specification due to the rougher  environmental  conditions compared with shallow water.

Source: RHB