Dayang Enterprise reported 9M14 core earnings of MYR147.3m, slightly below  our/in line  with  consensus  full-year  estimates,  at  70%/74% respectively. Maintain BUY on the premier local service player, with our lower TP of MYR3.73 (from MYR4.52) pegged to a 13x FY15F P/E (from 16x) and offering a 30% upside. We also trim our FY14F earnings by 6% but maintain our FY15 forecasts. 

9M14  core  earnings  of  MYR147.3m,  Dayang  Enterprise  (Dayang) registered 9M14 revenue of MYR635.3m  (+71.3% YoY)  on the back of higher  work  orders  from  its  hook-up,  construction  and  commissioning (HuCC) as well as topside structural maintenance (TSM) contract. Core earnings came in at MYR147.3m  (+58.7% YoY),  below  our expectation but  in  line  with  consensus,  at  70%  and  74%  of  full  year  estimates respectively,  as we had  overestimated the amount  of work orders that it would receive this year.

Outstanding  orderbook  of  MYR4.2bn.  Dayang  currently  has  call-out contracts from its HuCC/TSM contracts worth MYR4.2bn, which will keep the  company  busy  until  2018.  It  has  an  outstanding  tenderbook  of MYR800m which we believe is related to an enhanced oil recovery off the coast of Sarawak.  Recall that Dayang did a  private placement which raised  MYR175.6m, the proceeds of which were  utilised to  increase its stake  in  Perdana  Petroleum  (PETR  MK,  BUY,  TP:  MYR1.62),  which currently  stands  at  28.6%,  and  also  to  ramp  up  its  capacity  for engineering, procurement, construction and commissioning (EPCC) jobs. 

Maintain BUY with a lower TP of MYR3.73. In light of its results coming in below our expectation, we downgrade  our FY14 earnings estimate  by 6% but  leave our FY15  numbers unchanged.  Going forward, Dayang’s growth  will be  from increased  work  orders from its  current HuCC/TMM contract. We also apply a 13x  (from 16x) FY15F P/E to the stock, which is  at  the  higher  end  of  our  8x-13x  P/Es  for  service  players  under  our coverage,  to  derive  a  new  TP  of  MYR3.73  (from  MYR4.52).  Dayang deserves  a  premium  valuation  as  we  believe  it  is  the  premier  local  oil and  gas  player  with  an  excellent  track  record.  The  stock  is  currently trading at a 9.4x FY15F P/E.

Concerns  on  oil  prices.  We  believe  the  stock  has  been  unfairly  pressured downwards  as  the  market  turned  negative  on  oil  and  gas-related  counters  over concerns on the weakness in crude oil prices. HuCC/TSM works are mostly related to maintenance  and  upkeep  work  on  currently-producing  platforms  and  offshore structures. Having done our  channel checks as well as followed up  with Dayang, we have confirmed that its  work orders are still coming in and fears of a slowdown are unfounded.

Increasing stake in Perdana.  As highlighted in our 5 Nov  report,  Dayang Enterprise : Slowly Increasing Stake In Perdana Petroleum,  the company  has been increasing its  stake  in  Perdana  Petroleum  by  buying  shares  from  the  market  in  light  of  thelatter’s  share  price  weakness  by  utilising   some  of  the  proceeds  from  its  private placement.  From  Oct  2014,  Dayang  has  bought  an  aggregate  30.2m  Perdana shares, increasing its stake to 28.6%. Recall that Dayang is looking to venture into EPCC jobs, which have  more stringent vessel requirements compared to its current HuCC/TSM work. Perdana owns a fleet of youn and modern vessels which wouldallow  Dayang to meet the  vessel  criteria  easily. Owning  a  larger  stake  in  Perdana makes  economic  sense  for  Dayang  as  it  would  present  both  players  with  more synergistic opportunities as well as potential cost savings.

Source: RHB