This article first appeared in The Edge Financial Daily on October 25, 2019 - October 31, 2019

Dayang Enterprise Holdings Bhd
(Oct 24, RM1.99)
Maintain neutral with a target price (TP) of RM1.80: Dayang Enterprise Holdings Bhd has registered impressive performances thus far this year in terms of business activities and reported earnings, which have been reflected in its share price. In anticipation of more job orders to come in the second half of financial year 2019 (2HFY19), coupled with ongoing debt restructuring exercises which would likely see Dayang’s 60%-owned unit Perdana Petroleum Bhd turn a profit and some interest savings at the group level, Dayang looks set to deliver even stronger performances beyond this year. We tweak our FY19 to FY21 forecasts higher by an average of 11.4% and peg our adjusted FY20 earnings per share estimate at a higher price-earnings ratio of 12 times (from eight times before the proposed debt restructuring), hence deriving a TP of RM1.80. Our “neutral” rating remains unchanged as we see all the positives having already been priced in.

As of September, Dayang’s outstanding order book remained strong at RM3.2 billion, translating into 3.5 times FY18 revenue. This included three new contracts secured this year from SEA Hibiscus, ROC Oil and Petronas Carigali Sdn Bhd respectively for the provision of maintenance, construction and modification as well as hook-up and commissioning. While these awards are on a call-out basis, we gather that they could be worth a combined RM800 million with contract lifespans of one to five years.

We are upbeat about its growing order book, with more job orders expected to come in the near term under “farm-in” contracts, on the back of Petroliam Nasional Bhd’s (Petronas) commitment to deploying RM35 billion capital expenditure in 2H this year — of which 50% (RM17.5 billion) would be allocated for domestic investments. Given Dayang’s strong position as a brownfield service specialist and good track record in handling similar contracts in FY13, it could be a key beneficiary. It would not be surprising if Dayang tops its highest-ever order book of RM4 billion in FY14.

Dayang reported strong earnings for the second quarter (2Q) of FY19 after a loss of RM5.2 million for 1QFY19, though this was not a significant surprise considering the monsoon season. With a ramp-up in activities post the monsoon, Dayang reported a core profit of RM53.7 million for 2QFY19, with a cumulative 1HFY19 core net profit of RM48.5 million. Moving into 2HFY19, we believe the momentum will be even stronger as more plant turnarounds take place with healthier lump sum work orders under its topside maintenance contracts, which will consequently contribute to higher billings and profit margins, also supported by a higher average utilisation rate of Perdana’s vessels of 80% that narrows losses.

To recap, Dayang in May announced its debt restructuring plan with the main objective of turning Perdana profitable besides enabling the latter to preserve its cash flow for working capital requirements post a reduction in its debt load. The restructuring has since resulted in Perdana’s debt reducing from RM630 million to RM130 million, translating into a gearing of 0.2 times from 1.4 times and interest cost savings of about RM30 million per year. Coupled with higher utilisation of vessels, we believe Perdana is in the right direction to see a turnaround in FY20. — PublicInvest Research, Oct 24