We reiterate our OUTPERFORM call on DAYANG with a higher TP of RM1.25 (from RM1.00). We expect DAYANG to secure more jobs at better rates during the impending new contract cycle as the playing field has become less crowded with a number of competitors having dropped out from the race. A stronger balance sheet allows it to bid for longer-term contracts, improving its earnings risk profile.
Highlights. We came away from an engagement with DAYANG feeling positive. The key takeaways are as follows:
1. A new contract cycle. As we get closer to the end of the current contract cycle (most of DAYANG’s contracts fall under this category, expiring in 2023), new contract tenders and extension awards are expected to be called and dished out within the next 6- 12 months. The playing field is now less crowded as a number of competitors have dropped out from the race following financial difficulties in the past two years. This enables DAYANG to secure more jobs at better rates, cementing its market leader position within the offshore maintenance space.
2. Stronger earnings ahead. Meanwhile, there has been higher demand for offshore maintenance and hook-up and commissioning works in the market against a backdrop of sustained high energy prices. We expect vessel utilisation to jump to 70-75% over the next two quarters (versus 25% in 1QFY22), which will be the highest since pre-pandemic levels.
3. Poised to secure longer-term contracts. We project DAYANG to turn net cash within the next 12 months, underpinned by better earnings prospects. A stronger balance sheet in turn allows it to bid for longer-term contracts (i.e. >10 years, as opposed to the current maintenance contracts lasting typically ~5 years), which could significantly improve its earnings risk profile.
Post update, we raised our FY22E/FY23E earnings by 7%/35% to reflect a stronger-than-expected recovery in the offshore maintenance segment and reduced competition with fewer active participants.
Reiterate OUTPERFORM, with a higher TP of RM1.25 (from RM1.00 previously) – pegged to 15x PER, which is at a 25% discount versus the average valuation of offshore maintenance peers back in 2014 (being the last year in which Brent crude was trading at above USD100/barrel, prior to the recent rally). A discount is applied versus valuations from the previous oil upcycle due to current business climate being much more demanding as clients currently are much more prudent in spending unlike the yesteryears.
Overall, we like DAYANG for its promising earnings recovery visible in the coming quarters – with it being a good play on the overall recovery of local oil and gas activity levels.
Risks to our call include: (i) a sharp decline in oil demand and prices if the global economy slips into a recession, (ii) non-renewal of licenses issued by oil majors, and (iii) the entrance of irrational new players.
Source: Kenanga Research - 28 Jun 2022