We initiate coverage on Daya Materials Berhad (Daya) with an Outperform call and TP of RM0.28. Daya continues to focus on the O&G activities by leveraging on its new subsidiary – Daya Petroleum Ventures which will enhance its upstream and downstream activities. Key re-rating catalysts include: i) Huge outstanding order book, ii) Potential M&As and iii) Solid financial position.

Order book: RM1.6bn, Market capitalisation: RM200m.  Daya ticks many boxes when it comes to the screening of potential companies to invest in. It is in the oil and gas sector, one which we continue to like given the healthy levels of spending still to come. It has an outstanding orderbook which dwarfs its current market capitalisation, for reasons unknown which we think is unjustified. Its financial position is healthy, which allows it room to gear up as and when the need arises.

M&A Angle – Acquire small, think big.  We have seen M&A activity in the O&G sector increasing, with the main drivers being cost synergies, growth opportunities and to an extent, regulatory requirements. Daya is no exception, as management has indicated that the Group is in the midst of acquiring a small Malaysian company where it can enhance its market share. We do not discount the possibility of Daya being a potential M&A target as well.

Solid financial position.  Daya has seen improvements in its balance sheet strength in recent times, with net gearing falling from 19.5% in FY10 to 1.8% in FY2011, putting it in a strategic position to  take advantage of investment opportunities like engaging in larger acquisitions or  participating in more sizeable projects due to its ability to gear up. Additionally, the Group‟s operating cash flow is healthy given the shorter cash conversion cycle to 53 days (FY2011) from 74 days (FY2012).

Source: PublicInvest Research - 17 Jan 2013