Daya Materials’ (Daya) 9MFY14 revenue is within expectations, recording RM482.1m (+29.0% YoY, +2.7% QoQ), with earnings below YoY expectations at RM14.6m (-23.3% YoY, +91.2% QoQ), but which exceeded our estimates however. The Group’s results were positive this quarter from higher contributions from the O&G and technical services segments, but YTD remains affected by higher operating expenses and set-up costs in the subsea business. We foresee the Group’s challenges to persist for the interim, amplified further by the poor sentiment of the industry from falling oil prices coupled with the vessel acquisitions which would affect the Group’s performance.

We thus maintain our Neutral call with a rerated TP of RM0.25 premised on our FY15F EPS of 2.5sen, pegged to a 10.0x PE. We have adjusted our earnings estimates to account for the higher costs going forward. Daya’s performance despite the re-rating, is supported by SD1 and SD2 tied to LT charters coupled with upside from its growing technical services and polymer divisions to meet our FY15F estimates.

Cautious outlook, pending the acquisition of DP1 and DP2 to be completed 1QFY15. Daya will remain Shariah-compliant as the RM600m is of a 7-year term Islamic vessel financing. Daya’s bottom-line performance furthermore remains affected by higher operating expenses such as the prolonged set up costs of the subsea business. From our previous note we discussed our issues of the above acquisition which would potentially severely dilute the Group’s EPS from higher finance costs which could offset any anticipated earnings gains. This scenario however would be diminished in the long-run pending the replenishment of orderbook. 3QFY14 saw 3 new contracts worth RM90m added to its orderbook, with its tender book to expand to >RM2.2bn.

O&G (Revenue: 48% contribution), was spurred by the long-term deployment of SD1 and SD2 in the North Sea since March 2014 whereby both vessel contracts have been extended to 7 years. In 3QFY14, the Group achieved 100% SD1 and 98.9% SD2 utilization rate with this trend expected to continue. Going forward, pending the finalization of the acquisition of SD1 and SD2, Daya should see improved owned-vessel margins. For the downstream business, the downstream chemicals and specialized lifting services continue to contribute positively to the Group.

Other segments. Technical Services will perform well as the Group builds and execute its orderbook. Daya will continue to leverage on its engineering expertise to expand its revenue stream, secure new contracts and build its overall brand equity. Polymer business remains subdued from the slow growth of the industry coupled with continued foreign competition. Daya will continuously be looking for alternative business models to ensure the consistency of this division’s contribution

Source: PublicInvest Research - 26 Nov 2014