• Keep BUY and MYR1.53 TP (14x FY23F P/E), 39% upside. We are upbeat on the amendment and extension of Dayang Enterprise’s maintenance, construction and modification (MCM) contract from Petronas Carigali (PCSB), as this ensures the sustainability of job flow until end-2023. The upward adjustment of >20% in service rates is likely to cushion the impact of a higher cost of doing business, and lead to stronger margins for the company.

• MCM contract extended until end-FY23. Yesterday, Dayang announced that it has been awarded a contract amendment and extension for the provision of offshore MCM services from PCSB. The value of the contract is based on work orders issued by PCSB throughout the extended contract duration, from 20 Sep 2022 to 31 Dec 2023.

• Rate revision leading to margin improvement. We are positive on the contract extension, as it ensures the sustainability of job flow until the end of 2023. Although the value of the contract was not known – as it is dependent on work orders taken – we expect MCM work orders to ramp up next year with the increase in spending by Petronas. Meanwhile, we understand that there is an upward adjustment of >20% in terms of service rates, to cater for rising material and equipment costs, as well as the cost of doing business. Assuming MCM work orders are worth MYR50-60m per month, total estimated work orders could come up to MYR750-900m. Dayang’s orderbook size should remain largely unchanged at MYR1.7bn, as the previous estimated uncalled work orders will likely materialise under the contract extension. Overall, we still expect margin improvement in FY23, following the rate revision. At the same time, we also understand that Dayang is negotiating for better rates to be applied to integrated hook-up and commissioning jobs (HUC), which could further protect margins from rising costs, as mentioned earlier.

• We maintain our earnings estimates as we have already imputed the MCM contract extension with better rates into our projections. Our unchanged TP of MYR1.53 is based on 14x FY23F P/E, or +1SD from its 5-year mean, with a 2% ESG discount applied as per our in-house proprietary methodology. As an experienced upstream maintenance player, Dayang is set to benefit from the 5-year contract renewal cycle starting next year. While we expect earnings growth of 18-107% in FY22-24F, led by stronger HUC jobs as well as MCM work orders, the potential win of the Safina project could drive fleet rejuvenation, backed by its strong balance sheet.

• Downside risks: Lower work orders, softer oil prices – which could limit clients’ spending – and higher operating costs.

Source: RHB Research - 21 Oct 2022