Dayang Enterprise (Dayang) has been registering impressive performances thus far this year in terms of business activities and reported earnings, thereby reflected in its share price. In anticipation of more job orders to come in the 2HFY19 coupled with the on-going debt restructuring exercises which would see Dayang’s 60%-owned unit, Perdana Petroleum likely to turn in a profit and also see some interest savings at the Group level, Dayang looks set to deliver even stronger performances beyond this year. As such, we tweak our FY19-21 forecasts higher by an average of 11.4% and peg our adjusted FY20E EPS to a higher PER of 12x (8x previously, before the proposed debt restructuring), hence deriving a ex-TP of RM1.80. Our Neutral rating remains nonetheless as we see all the positives having already been priced-in.
Solid orderbook of RM3.2bn. As of Sept 2019, Dayang’s outstanding orderbook remains strong at RM3.2bn, translating to 3.5x of FY18’s revenue. This includes the three new contracts secured this year from SEA Hibiscus, ROC Oil and Petronas Carigali for the provision of maintenance, construction and modification (MCM) and Hook-up & commissioning (HUC). While these awards are on call-out basis, we gather that it could be worth a combined c. RM800m with contract lifespan from 1-5 years.
Upbeat on growing orderbook, with more job orders expected to come in the near term from “farm-in” contracts. This is on the back of the Petronas’ commitment to deploy RM35bn capex in the 2H this year of which 50% (RM17.5bn) will be allocated for domestic investments. Given Dayang’s strong position as a brownfield services specialist and having good track record in handling these similar contracts back in 2013, Dayang could be a key beneficiary of this. It would be no surprise if Dayang tops its highest ever orderbook of RM4bn back in in 2014.
Stronger earnings anticipated in 2HFY19. Dayang reported strong earnings in 2QFY19 after it reported an RM5.2m loss in 1Q, though the latter not coming as a significant surprise considering the monsoon season whereby offshore activities were low. With the ramp-up in activities post monsoon, Dayang reported a core profit of RM53.7m in 2Q, for a cumulative 1HFY19 core net profit of RM48.5m. Moving into 2HFY19, we believe the momentum will be even stronger as more plant turnarounds take place, providing Dayang healthier lump-sum work orders on its topside maintenance contracts which will consequently contribute to higher billings and profit margins. This will also be supported by the higher utilization of Perdana’s vessels in the 2H, averaging 80% hence narrowing its losses.
Looking good beyond FY19. In anticipation of more job orders to come in the 2HFY19 coupled with the on-going debt restructuring exercises which would see Dayang’s 60%-owned unit, Perdana Petroleum likely to turn in a profit and also see some interest savings at the Group level, Dayang looks set to deliver even stronger performances beyond this year. This comes against the backdrop of potential new wins from Petronas’ i-HUC (RM4bn), rejuvenation & EOR EPCC (RM4bn) and decommissioning and abandonment works next year.
To recap, in May this year, Dayang announced its debt restructuring plan with the main attention of turning Perdana profitable besides to enabling Perdana to preserve its cash flow for its working capital requirements post-reduction of its debt load. The restructuring has since resulted in Perdana’s debt reducing from RM630m to RM130m, translating to a gearing of 0.2x from 1.4x and interest cost savings of c. RM30m/year. Together with higher utilization of vessels, we believe Perdana is in the right direction to see a turnaround in FY20. Post-debt restructuring, we foresee the breakeven utilization will reduce to 65%, from 80% currently.
For Dayang, the share base will be enlarged by 20% to 1.16bn post rights issue and private placement. Proceeds raised from these corporate exercises of around RM150m will be using to reduce the Group’s debt partially as well as for working capital. Upon completion, Dayang’s gearing will be lowered to 0.6x from 0.8x currently and generate interest cost savings of around RM7m/year.
Higher valuations warranted. Set against this favorable backdrop, we tweak our FY19-21 forecast higher by an average of 11.4% and peg our adjusted FY20E EPS to a PER of 12x (8x previously, before the proposed debt restructuring), hence, deriving a ex-TP of RM1.80. Our Neutral rating remains nonetheless as we see all the positives having already been priced in.
Source: PublicInvest Research - 24 Oct 2019