We initiate  coverage  on Daya  with a MYR0.48  FV,  pegged to 15x FY14F EPS, in line with other small  cap  oil & gas (O&G)  companies.  The O&G division will spearhead  its  growth going forward, given  its ambition to expand its expertise beyond the downstream segment.  We like Daya’s strong  earnings  growth,  attractive  12x  FY14F  P/E  and  potential ownership of vessels to capture higher recurring earnings.

• An undiscovered gem.  Despite a shift  in  focus to  the O&G segment  in 2007  from polymers and technical services, Daya  has yet to receive the attention it deserves from the investment community. We believe this is due to  the  lack of a solid  domestic  track record.  Locally,  Daya  has only been involved in  the  Tapis  enhanced  oil  recovery  (EOR) and Telok Gas Development projects.
• First  local  O&G  company  to  clinch  a  North  Sea  job.  A  major milestone for Daya was when its subsidiary, Daya Offshore Construction (DOC),  landed two  long-term  North Sea contracts from Technip  totalling up to MYR610m in August this year.
• Potential  vessel  ownership  will  add  significantly  to  bottomline. Management  indicates that  DAYA intends to  acquire stakes in the  Siem Daya  1  (SD1)  and  Siem  Daya  2  (SD2)  offshore  subsea  construction vessels  (OSCVs).  If  finalised,  we  are  positive  on  the  deal  despite  the group having to take on higher debt, as  –  assuming  a  51% stake in a USD120m  vessel  and  75%  debt  to  total  asset  –  we  estimate  DAYA’s share of net profit at MYR4.9m per annum per vessel.  
• O&G  to  drive  21%  EPS  CAGR  over  FY12-15F.  We  expect  Daya  to achieve  65%/27%/6.8%  earnings  growth  for  FY13F/14F/15F,  mainly driven by its North Sea charter contract and higher orderlook recognition from offshore services.
• BUY,  MYR0.48  FV.  Our FV is based on  a  15x FY14F P/E,  in  line  with other small cap O&G stocks. Daya is trading at a FY14F P/E of 12x, or a 25% discount to its comparable peer average. The key risks are: i) falling out with Siem Offshore (SIOFF NO, NR), ii) inability to maintain high fleet utilisation, iii) loss of key personnel, and iv) USD volatility.

Investment Merits

Joining the fray
We believe that  Daya  management’s  apparent  shift  in focus to expand  its offshore O&G capability has been timely. Despite the lack of a track record, Daya managed to clinch a North Sea subsea services contract from Technip that was heavily  contested by  other  more  established  international players.  This provides a solid foundation to back its bid for more Malaysian offshore O&G contracts.  

The right ingredients
Daya’s push to break out of its bread-and-butter business can be credited to its highly capable  management  team,  which  has  a  diverse  background  and  expertise.  The presence  of  management  personnel  with  prior  working  experience  in  international O&G  companies  also  provides  inroads  into  abundant  overseas  contract opportunities.

Ready commitment the winning factor 
We view  that Daya’s ready commitment  to deploy the  state-of-the-art  SD1  OSCV  as the winning factor behind  the  landing  of  the Technip  contract.  The risk taken by the group  to  charter  the  vessel  from  SIOFF  for  the  purpose  of  the  contract  also represents management’s confidence in its offshore services capability.

Capex-light model
SIOFF’s  willingness  to  jointly-control  future  offshore  subsea  construction  vessels (OSCVs) helps lighten the burden of high capital expenditure  and financing costs that come with 100% ownership.  It also allows room for the  group to venture into other offshore O&G opportunities such as risk-sharing contracts (RSCs).

Undemanding valuation
Daya  is  currently  trading  at  12x  based  on  our  FY14  EPS  estimate  of  MYR0.032, making it one of the cheapest proxies to the O&G sector. Its growing subsea services business, sizeable construction and engineering orderbook, positive contribution from its tank-cleaning services,  and the ramping-up of its  solvent and waste oil recycling plant underpin our bullish earnings estimate for FY14 onwards.

Investment Risks

Falling out with SIOFF 
Its  subsea  services  division  would  be  at  risk  should  SIOFF:  i)  bids  for  similar contracts  on  its  own,  ii)  refuse  to  charter  its  OSCVs  for  future  bids,  or  iii)  charge higher charter rates that will erode profits.

Loss of key personnel
We  believe  that  Daya’s  growth  is  highly  leveraged  on  a  few  key  personnel.  Any departure may stunt its potential. Inability to fill in the gaps It is possible that Daya may not be able to secure OSCV spot charters in time for the “naked period”,  ie  after  the end of the long-term charter  (100-175 days)  with Technip every year. However,  we view this risk as limited, owing to the growing need for such vessels in the market.

Exchange rate volatility
Considering  that  the  bulk  of its O&G revenue is USD-denominated,  the greenback’s weakness vs the MYR will lead to lower profitability for Daya’s O&G segment.

The Perfect Concoction

•   Several  notable  M&As  form  a  stronger foundation for the group
•   A  highly  capable  management  team  with  a broad range of background and expertise

Background

Daya  was  established  in  1994  and  was  initially  involved  in  the:  i)  manufacturing compounds  for  cables  and  wires,  and  ii)  trading  in  specialty  chemicals,  related polymer and compounds, and hardware. It was listed on the ACE Market in July 2005 and transferred to the Main Board in November 2009.

Today,  Daya  is  a  small  integrated  O&G  player  that  offers  mainly   offshore  and onshore services.  These  include  the provision  of:  i)  complete  logistics,  trading  and distribution  of  specialty  chemicals  and   catalysts,  ii)  technical  services  to  the downstream O&G sector, and iii) subsea and crane services.

The management team

Dato’ Azmil Khalili bin Dato’ Khalid 
Dato’  Azmil  is  an  independent  non-executive  chairman  of  the  group  and  was appointed to the  board on 19 Sept 2007. He graduated with a Bachelor’s  degree in civil  engineering  and  subsequently  with  a  Master’s  in  business  administration.  He currently holds positions  in various listed and non-listed companies that are involved in  the  construction of infrastructure, environment, building and manufacturing plants, property  development,  quarrying,  and solid  waste  management,  among  others.  He was a former non-independent non-executive  director of M3energy, an exploration  & production (E&P) company with strategic focus on marginal field development.

Dato’ Mazlin bin Md Junid 
Dato’  Mazlin  is  an  executive  vice  chairman,  president  and  group  CEO.  He  was appointed  to  the  board  on  16  Aug  2007  following  the  merger  between  DSSB  and Daya  Materials  group.  He  holds  a  Bachelor  of  Science  in  mechanical  engineering and  a  Master’s  in  business  administration.  His  stint  in  several  well-regarded organisations  such  as  Sime  Darby  (SIME  MK,  BUY,  FV:  MYR10.73),  Sapura Industrial  and  Sapura  Technology  provides  him  with  vast  experience  in  corporate management, business and financial management. Dato’  Mazlin  is  the  driving  force  behind  Daya’s  pursuit  of  the  O&G  sector.  The group’s  gradual shift started in 2007 when DSSB merged with Daya Materials  group via  a  reverse takeover,  which also saw Dato’ Mazlin’s  appointment  to the board. He is now largely involved in the group’s O&G segment.

Nathan Tham Jooi Loon
Mr  Tham  was  appointed  to  the  board  on  30  May  2005  and  currently  holds  the position  of  group  managing  director.  He  is  a  qualified  chartered  financial  analyst (CFA) and was formerly attached to Chase Manhattan Bank in   1989 before joining UBS in 1995,  becoming  its  executive  director responsible for Malaysian investment banking and Asia-Pacific M&A practices. We believe his entry into the  group marks  the beginning of several  acquisitions and mergers  that  have proved  instrumental in  transforming  Daya  into  the entity that  it is today.  He  became  involved in the  business  upon  the invitation of  his brother, Daya co-founder Mr Tham Wooi Loon in 2005.  The former  took over as  group managing director when the latter resigned in 2011.

Fazrin Azwar bin Md Nor
He  is  Daya’s  senior  independent  non-executive  director  and  was  appointed  to  the board  on  30  May  2005.  He  holds  a  Bachelor  of  Law  (LLB)  Honours  from  the University  of  Malaya.  He  is  an  advocate  and  solicitor,  and  is  a  member  of  the Malaysian Bar. He is also a chartered member of the Malaysian Institute of Directors and the Institute of Internal Auditors Malaysia. He holds several  board  positions  in companies  that  are  involved  in  the  packaging,  steel  fastener  and  paint  industries, among others.

Dato’ Sri Koh Kin Lip
Dato’  Sri  Koh  is  an  independent  non-executive  director  and  was  appointed  to  the board on 22 Dec 2008. He graduated from Plymouth Polytechnic, UK,  with a Higher National  Diploma  in  business  studies  and  a  Council’s  Diploma  in  management studies.  He  is  the  founder  of  Rickoh  Holdings  SB,  a  flagship  family  company incorporated in 1987 with interests  in property investment  and  development, leasing of properties, insurance brokerage, oil  palm  plantations,  sea  and  land transportation for  CPO  and  palm  kernels,  IT  business,  golf  equipment  and  accessories  trading, quarry operations, and hotel businesses.

Lim Soon Foo (with Ronnie Lim Hai Liang as alternate director)
Mr Lim is an independent non-executive  director and was appointed to the  board  on 15  Aug  2011.  He  has  been  a  member  of  the  Chartered  Institute  of  Shipbrokers, London,  since 1979  and holds positions in companies that provide  highly specialised services in the  Asia-Pacific fibre  optic submarine cable industry. He also holds board positions in several non-listed companies  that are  involved in plantation, logging and real estate.

Mark Midgley (of Daya Offshore Construction)
Daya Offshore Construction (DOC)  is helmed by two highly experienced personnel based in Oslo, Norway, namely Mr Mark Midgley and Mr James Klopper. Mr Midgley joined DOC as CEO in 2012. He has a Bachelor of Engineering degree in mechanical  engineering  and  started  his  career  in  the  O&G  industry  with  Wharton Williams in the Middle East in 1983. Mr Midgley holds a 20% stake in DOC.

James Klopper (of Daya Offshore Construction)
Mr Klopper has been DOC’s COO since April. He began in O&G career with  Clough Offshore where he spent 10 years working in various countries within the Asia-Pacific region. He subsequently worked for several O&G giants like  McDermott  (MDR US, NR), Subsea 7 (SUBC NO, NR) and Petrofac (PFC LN, NR).

O&G At The Forefront

• Daya  is  recognised  for  the  quality  of  its services, which boosts its ability  to represent international  principals  in  the  downstream segment
• Management remains positive on Indonesia’s population  growth,  which,  in  turn,  will  drive the largely untapped use of LPG
• Offshore O&G business  is the main thrust of growth for the group
• It  clinched  its  first  international  O&G  subsea contract from O&G giant Technip

Onshore activities.  The  onshore O&G business under Daya Secadyme SB (DSSB) revolves around the transportation, trading and distribution of specialty chemicals and catalysts.  This  100%-owned  subsidiary  was  injected  into  the  group  via  a  reverse acquisition in Aug 2007. The MYR24m acquisition was satisfied via: i) the issuance of 83.6m new ordinary shares in Daya at an issue price of MYR0.23 per share, and ii) a cash consideration of MYR4.8m.

DSSB  holds  25  important  licences  from  Petronas,  complemented  by  an  ISO 9001:2008  certification.  Its  heavy  investment  on  logistic  equipment  over  the  years lent  credibility  that  helped  bag  the  rights  to  represent  50  different  international principals  like  Arkema  Inc,  Sud-Chemie  Inc,  JJ  Degussa  Chemicals,  Infineum International and The Dow Chemical Co (DOW US, NR). Petronas and Gas Malaysia (GMB MK, NR) are among its local customers.

DSSB is also the sole supplier of odorants for gas in Malaysia and has extended its footprint  into  Surabaya,  Indonesia,  via  a  contract  with  Pertamina.  DSSB’s  market presence in Indonesia  is still small,  but it has the scope to expand beyond Surabaya going  forward.  The  Indonesian  market  remains  attractive,  given  its  tremendous population  growth  and  the  use  of  liquefied  petroleum  gas  (LPG)  LPG,  to  which DSSD’s  odorant is added into,  has yet to reach nationwide  acceptance and hence provides opportunities for expansion.

Onshore/offshore  activities.  Daya  Proffscorp  SB  (DPSB),  another  unit  within  the O&G segment, is  mainly involved in the provision of mobile  cranes  and heavy lifting services  for  both  the  onshore  and  offshore  O&G  industries.  It  has  a  fleet  of  25 cranes, ranging from a 20-tonne Tadano to a 400-tonne Liebherr, aged 2-30 years. Offshore  activities.  Offshore  works  are  undertaken  by  its  Daya  Offshore Construction  SB  (DOC)  subsidiary.  It  offers  specialised  subsea  construction, installation,  engineering,  as  well  as  inspection,  repair  and  maintenance  (IRM) services locally and abroad. DOC operates a fleet of vessels, coupled with technically advanced  equipment,  survey  systems,  remotely  operated  vehicles  (ROVs)  and modulated diving systems (MHS). The company is currently backed by a team of 40-50 people. The game changer.  In August  2013, Daya  announced that its sub-subsidiary, Daya OCI (Labuan) Ltd (DOCIL) entered into a  charter  party  contract with Technip Norge AS (Technip) to provide an OSCV (the SD1) that will undertake a range of offshore services works for Technip in the North Sea and North Atlantic. DOC will execute the charter on behalf of DOCIL.

The contract is the group’s biggest achievement  to date, as it marks  its maiden foray into  the  international  offshore  subsea  services  market.  DOCIL  trumped  six  other international  bidders  who  have  far  superior  experience  in  executing  works  of  such nature, especially in the  harsh environment  of the North Sea. Apart from providing a team of highly-experienced engineers, it  was the deployment of the state-of-the-art SD1 by a fledgling O&G services company that greatly impressed Technip.

The arrangement entails a daily charter rate of USD102,000  per  day for a period of 100-175 days per  year for seven years. The contract is set to commence in 1Q14. A shorter-term charter of 40 days commenced in mid-September  and  4Q13 will be the first full-quarter contribution from Daya’s charter services. We gather  from management that Technip has agreed to charter  the SD1’s “sister” vessel (the SD2), under similar terms but for a shorter period of three years.

Source: RHB