• Initiate coverage with BUY, MYR1.53 TP based on 14x FY23F P/E, or +1SD from its 5-year mean (2% ESG discount), 34% upside. As an experienced upstream maintenance player, Dayang Enterprise 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 hook-up & commissioning (HUC), and maintenance, construction and modification (MCM) work orders, the potential win of the Safina project could drive fleet rejuvenation, backed by its strong balance sheet.

• Solid work orders, potential replenishment in FY23. As of end-2Q22, Dayang’s orderbook stood at MYR1.7bn, of which Petronas’ MCM and integrated HUC (i-HUC) contracts contributed c.76%. With higher spending from Petronas and other clients, we expect i-HUC and MCM work orders to ramp up. These contracts are due for renewal in FY23, and we see a potential replenishment of c.MYR3.5bn, aside from current tenders worth MYR500m. Management guided that manpower working permits have been largely resolved, with most workers under 6-month permits.

• Margin improvement. Overall margins could improve in 2022-2024 on the back of a better operating environment (potential rate revision and higher vessel utilisation) and the relaxation of quarantine requirements and SOPs. Note that Dayang’s GPM (ex-impairments) was at 12% in 2021, and could return to FY20’s 32% this year. We believe it will take time for its margin to resume to pre-pandemic levels of 40-47% (2018-2019), especially when the company is facing growing pressure in logistics and equipment costs.

• Perdana Petroleum (Perdana) to break even next year. 63.7%-owned Perdana’s vessel utilisation rate was at 47% in 1H22 – we expect this to improve in 2H22 and 2023. The full-year utilisation rate is targeted at high >50% (FY21: 49%) levels. Most vessels are on spot charters, and daily charter rates are improving. Management expects overall OSV demand to pick up, driven by stronger demand for drilling, plug & abandonment (P&A), and underwater services. Over half of Perdana’s vessels will be chartered internally to Dayang to execute its in-house projects. We think Perdana will see minimal losses in FY22 (FY21 core loss: MYR79m) and deliver a small profit in FY23.

• Project Safina could drive fleet rejuvenation. With an average fleet age of 12 years, Dayang is looking to kick-start its fleet renewal programme this year. It participated in Petronas’ Safina project, involving 16 OSV newbuild charter contracts. We believe it stands a good chance of winning the project, and is capable of growing its fleet by least 2-4 vessels, as its net gearing was at 0.08x as of 4Q21. Downside risks: Lower work orders, softer oil prices – which could limit clients’ spending – and higher operating costs.

Source: RHB Research - 23 Sep 2022