The Tale of Two Companies

Dayang & Perdana - Debts

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way—in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only – Charles Dickens: A tale of two cities.

This is the final instalment, enjoy.

Introduction

A tale of two cities was written in 1859. It is so apt for what had happened to Dayang’s share price.

Dayang won the bulk of HUC/MCM contracts for two cycles (2013-2018 & 2018-2023) when it started its association with Perdana back in 2011. The low oil price from 2015 to 2017, caused Dayang to miss the RM 1B revenue. Without Perdana, Dayang would not have the potential to reach RM 1B level (revenue) so quickly.

Perdana increased its fleet in late 2000s. That was the time of high oil price (>U$ 100/bbl). New vessels continue to be delivered right up to 2014.

Oil price dropped and stayed low for longer – late 2014 right up to 2017, causing untold trouble to most if not all oil and gas service companies in Malaysia and the world over. Oil majors slashed their maintenance & exploration budgets. Perdana – provider of accommodation work boats/barge (AWB) and anchor handling tugs (AHTS), was not spared.

Debts restructuring

There just was not enough work to generate the cash flow to service the loans taken to expand the fleet. In fact, a couple of vessels under construction were cancelled incurring much losses to Perdana and by extension, Dayang too. A very painful episode in Dayang / Perdana history.

It was a miracle that a SUKUK of RM 635M was issued in April 2016 to Perdana. Still, work never materialized like in the go go days of late 2000s.

Dayang, on the other hand is a money machine. Cash flow remains good despite the lower maintenance work being carried out from 2015 to 2017.

And it was Dayang that held the fort, so to speak, of Perdana. Advancing up to RM 280M to date (includes latest RM 90M to clear the sukuk payment paid on 26 April 19).

Improving times

However, as the saying goes, the bankers always take away the umbrella when it pours, is never truer here.

Perdana cash flow is improving, but not enough.

Interest payment at Perdana is crushing – RM 74M (2016), RM 60M (2017) & RM 56M (2018) and about RM 50M (2019).

Debt at Perdana came down from RM 999M (2015) to RM 633M (2018), courtesy of Dayang.

This can go on (Dayang keep paying Perdana debt) but there are many issues: -

• Inter-subsidiary borrowing issues (e.g. what interest rate to charge)
• Different entities, different shareholders - fairness
• High probability of default (by Perdana)

Perdana is under-capitalized. So it is Perdana that should be doing the right issues, I was wrong, yes  (RCPS) & no (Dayang RI / PP).

So Perdana debt problem became Dayang problem, while Dayang problem is Dayang problem.

The Solutions – RI & RCPS

Dayang proposes Right Issues (& Private Placement) and SUKUK

Perdana proposes RCPS – redeemable convertible preference share

As everyone knows by now, RCPS (redeemable convertible preferential shares) and how it will help reduce the debt level of Perdana to RM 368,912,000 from RM 633,252,000 (end 2018). Reducing debt is always good, lowering interest payment, the saving goes straight to the bottom line and re-focus attention of management to the core business. The downside is, there will always be an injection of equity, thus shares base increases, diluting all the per shares matrixes (within 10 years). Shareholders will need to come up with cash, you don’t, then your holding further diluted.

Let’s start with the RCPS – no interest, tenure is 10 years (long), conversion is 1 RCPS to 1 Perdana share within tenure and Perdana can redeem, also within tenure at issue price.

Therefore, issue price must be low (max 30% discount to 5-days Volume Weighted Average Market Price nearer to time of subscription) to entice (minority) shareholders to subscribe in the hope that given the long 10 years tenure, company performance will improve leading to higher share price. Thus, holder of RCPS will convert to normal share to enjoy the difference. But this conversion will increase the share base leading to dilution – a vicious circle this.

Possibility to redeem - why

At the same time, Perdana can redeem (when it has enough fund) at the same (low) issue price. As a (minority) shareholder, it is a “double edged” sword.

Will Perdana share price advance above issue price?

It appears that there is a feeling no one other than Dayang will subscribe (Dayang got no choice) as it will undertake to pick up minimum RM 455M worth of RCPS.

Subscription would be after Q2/3 report (better result), otherwise the base will be even larger than illustrated as the VWAMP would be less than RM 0.35 in Announcement issued on 17 May 2019.

When Dayang convert the RCPS, it will end up owning more than 75% of Perdana as per below: -

Dayang could then give dividend-in-specie (to Dayang’s shareholders) to ensure that it did not exceed the 75% rule, OR,

Perdana could, within the 10 years tenure, redeem part of Dayang RCPS so that Dayang does not breach the 75% rule. Number of RCPS to be redeem is as shown. A higher ISSUE PRICE of RM 0.335 per RCPS is given to show the lower overall number of shares that may be converted leading to lower dilution.

Dayang RI (PP) and SUKUK

For above RCPS to work, Dayang must secure RM 682.5M SUKUK, advance RM 365M to Perdana to pay off its SUKUK and use remaining RM 312M to refinance existing loan/borrowing.

A condition by bankers before giving the RM 682.5M is that, Dayang does a RI to show commitment from major shareholders, so, minority shareholders are caught (I was caught) too. From the grapevine, the private placement (PP) was part of the requirement (of bankers).

Both RI and PP will be 10% of current share issued (964.8M), that is, RI – 96.48M, PP – 96.48M given a post exercise of 1,157.8M shares (rounding error) – a 20% dilution.

It will be interesting who the PP will be given to – EPF, KWAP, some "special" firms or maybe not issued at all. The announcement said the PP will be used in 36 months – why?

The complex flow of money is as shown: -

Sorry, accountants among the readers, this is just my layman view.

Yes, the RI and PP will raise more than RM 70M and RM 75M, balance will be used either as working capital and paying the bankers for the fund-raising exercise.

What a wonderful instrument, RCPS – issue some papers and voila, Perdana debt (amount due to Dayang) reduced!

Dilution

For Dayang, the dilution for EPS is a maximum 20% or less should PP be less than 10%.

As for Perdana, the dilution for EPS is astronomical, 3.2 to 3.5 times while the NA per share only drop about 39% (from Announcement).

However, for Perdana, debt will drop from RM 824M to only RM 369M (external plus Dayang advance) resulting in an estimated interest saving of RM 16M (6% interest rate) that will go to the bottom line.

Ten years, the duration that all (debt restructuring committee members) think will solve all (financial) problems, how to then value the RCPS? To subscribe or not? A (minimum) 3% coupon rate would be more enticing.

Oh, my love, my Dayang

I've hungered for your touch
A long, lonely time
Time goes by so slowly
And time can do so much
Are you still mine?
I need your love
I need your love
God speed your love to me  -  to the tune of "Unchained melody"

https://www.youtube.com/watch?v=4MJwXaGhjrA

Love hate relationship

One cannot do away of the other, but one gets into trouble because of the other.

Moving forward, one cannot look at Dayang in isolation, one must understand Perdana too. When Perdana do well, Dayang’s result will be excellent.

Why don’t then, Dayang just take Perdana private? I have no answer.

With the latest (Perdana) contract announcement, wining the umbrella contract from Petronas is a major win. It requires 11 vessels (6 AHTS & 5 AWB), 68% of Perdana 16 vessels. And with the many vessels already committed to Carigali and Dayang, Perdana is stretched (an understatement). Coming quarters will be better than 2018. Therefore, Dayang coming results will also be better than 2018.

This shows Petronas commitment to carry out the many projects outlined in their Activities Outlook. And one can rest assured there are works a plenty out there.

In conclusion, these proposals - RI / PP / Sukuk / RCPS will resolve the under-capitalization at Perdana at the same time reduces debt and advance (from Dayang) for an increase debt level at Dayang that Dayang should be more than able to service. Quite elegant.

To recap, here is the forecasted revenue, net profit, EPS, fully diluted included for completeness.

Epilogue

There is a push / pull for PETRONAS to do more. Malaysia economy is in the doldrum. And PETRONAS has said that they are committed to doing more. My friend’s rubbish collection business is also benefitting from the higher activities offshore now (rubbish must be brought onshore for disposal), multiplier effect!

For all the above (RCPS, RI/PP) to work, “someone” will need to push the prices of both Dayang and Perdana to at least near or higher than the VWAMP shown in both Announcements. Otherwise the whole deal may fall apart, especially Dayang RI and PP.

This series is to highlights the differences between IBs research and my assumptions.

This is the last episode/instalment/part of this (Tale of two companies) journey. Much like the “Camino de Santiago”, one (reader) can join anywhere or start at the very beginning. Don’t get me wrong, I am not religious and my knowledge of GOT is from my son, I have not watched a single episode of GOT.

Or as Philip (Superforecasting) said “no better than a monkey throwing dart”, I hope I am nearer toward being Bran.

But the journey continues …. it is never ending, hopefully the follies become fewer and fewer.

Disclaimer

I (and my family) have much skin in Dayang and Perdana.

Dayang and Perdana did not pay me to write this. I wrote this on my own.

This is not to ask you to buy or sell Dayang or Perdana or any other shares in Bursa. You do so at your own risk.

References:

1. www.malaysiastockbiz.com – Dayang’s quarterly section
2. Dayang and Perdana Annual Reports
3. Bursa company announcements section
4. Petronas Activity Outlook 2019 to 2021
5. Hong Leong Investment Bank research
6. Kenanga research
7. MIDF research
8. Public Investment Bank research
9. The Edge Financial Daily
10. Superforecasting by Philip Tetlock & Dan Gardner
11. A Tale of Two Cities by Charlies Dickens
12. Camino de Santiago - http://santiago-compostela.net/

Our eyes are placed in front because it is more important to look ahead than to look back, yes, but one must have (past) experience to know what to look for.