We upgrade DAYANG to MARKET PERFORM with a FD-TP of RM1.35, on possible earnings recovery in coming quarters, after disappointing losses in 1Q19. The company is also in active tenders for Petronas’ i-HUC contract, with forward earnings to be driven by current order-book of >RM3b. While corporate exercise is expected to mildly dilute share base (by ~20%), we believe any overhang will be short-lived given its relatively palatable size.

Expecting better results. After disappointing losses in 1Q19, we believe that DAYANG could stage a possible earnings recovery in its upcoming 2Q19 results. This is because the company could potentially see a surge in work orders, coming off on the back of a quiet monsoon season in 1Q19, coupled with an anticipated stronger utilisation for its offshore vessels. To recap, despite the losses in 1Q19, its offshore vessels’ utilisation actually surged to 36% (from 27% in 1Q18 and 24% in 1Q17), dragged only by its poorer-than-expected topside maintenance. Thus, it is likely to see a stronger vessel utilisation trajectory for the rest of the year, while the slower maintenance work orders in 1Q19 could also mean a cascade of work flows to 2Q19.

Tendering for new contract. Currently, the company is in active tender for Petronas’ I-HUC contract. The contract covers topside hook-up, commissioning, and maintenance works for Petronas, and carries a gross contract value of ~RM4b, with award date expected by end-2019. Given DAYANG’s industry-leading expertise in the offshore maintenance space, we reckon it is likely that the company could possibly win a portion of the gross contract, guesstimated at a value of ~RM1b. Meanwhile, current forward earnings will be largely underpinned by its existing orderbook of >RM3b after it successfully secured a slew of new 5-year PM-MCM contracts over last year.

Little overhang expected from rights issue. To recap, the company had recently announced a series of proposed corporate exercises, entailing rights issue and private placement, to raise ~RM187m. While this is expected to tentatively dilute its share base by ~20% (based on illustrative exercise prices), we feel that any shares overhang, if any, could be short-lived given its relatively palatable size. This is also expected to lead to an interest savings cost of RM6.6m per annum.

Upgrade to MARKET PERFORM (from UNDERPERFORM previously), as we believe all negatives have been well priced-in (e.g. anticipated announcement of rights issue, and expected weaker 1Q19 results).

We raised our SoP-TP to RM1.35 (from RM0.80 previously), as we (i) raised our FY19-20E earnings by 16-22% on better margins assumptions and lowered finance costs, (ii) taking into account the fully diluted share-base post-corporate exercises, and (iii) raising our PER valuations on topside maintenance to 15x (from 9x before) – in-line with sector average valuations. Our TP implies PBV of 1.3-1.2x, and PER of 14-13x (in-line with 5-year average).

Risks to our call include: (i) weaker-than-expected work orders, (ii) weaker-than-expected vessel utilisation, and (iii) poorer-thanexpected margins.

Source: Kenanga Research - 4 Jul 2019