This article first appeared in The Edge Financial Daily, on May 24, 2016.

Daya Materials Bhd
(May 23, eight sen)
Remain neutral with a target price (TP) of 12 sen: Daya Materials Bhd via its subsidiary Daya Vessels Ltd, formerly known as Daya OCI (Labuan) Ltd (DVL), has announced the termination of charter for Siem Daya 2 (SD2) from Siem Offshore Rederi AS (Soras). The charter contract signed on Sept 3, 2013, was for five years with an option to purchase. 

We are assessing the financial impact on the overall group, however, and pending further clarity on its plans, we remain “neutral” on Daya Materials with a TP of 12 sen pegged to a price-earnings ratio of eight times on financial year 2016 forecast (FY16F) earnings per share of 1.4 sen. We understand that the adverse impact on Daya Materials from this termination would be cushioned by the substantially lower costs from the acquisition of SD1, which is expected to reflect its positive performance as of first quarter of FY16. 

The signed termination agreement between DVL and Soras was signed late evening on May 19, whereby the parties agreed to terminate the charter party. The rationale was to eliminate onerous obligations of the charter party and high-cost operation of the vessel, to minimise ongoing operating expenditures and future charter liabilities, to improve financial management, and to optimise DVL’s operations and Daya’s investments in the subsea sector. 

From our interim assessment, we are estimating a lower than about RM100 million impact on the group’s top line and about 25% to earnings based on the loss of SD2 contract from Technip Norge AS (Technip). We understand that the management has taken this prudent decision that is highly beneficial to the group in the long run given the significant cost savings and the continued uncertainties in the offshore sector. 

The oil and gas segment will continue to sustain the group’s performance, considering the long-term charter with Technip that will last until 2020, coupled with the lower-cost structure expected from the acquisition of SD1. We understand Daya Materials is continuously identifying key projects with longer-term earnings visibility coupled with cost saving initiatives to enhance the group’s prospects. — PublicInvest Research, May 23