DAYANG was awarded a HUC contract for 4+1 years from Roc Oil, with the value estimated at c.RM150-200m. We are positive on the award, being an extension of a prior 1-year HUC contract. Further wins could still come from i-MCM awards in late-2019. While we like the company’s outstanding management, upcoming share-base dilution and recent lossmaking quarter could act as potential drags. Maintain UP and TP of RM0.80.

Contract from Roc Oil. Last week, DAYANG announced being awarded a contract by Roc Oil (Sarawak) Sdn Bhd for the provision of procurement, installation, hook-up and commissioning services for Roc Oil Siprod/Infill Drilling Campaign (2019-2023). The duration of the contract is for a primary 4-year period effective May-2019, with an option to extend for one additional year.

Positive on the contract announcement. While no contract value was included in the announcement, as the actual value would be dependent on work orders issued by Roc Oil, we estimate the value to be somewhere around the region of RM150-200m. Based on our understanding, we believe this contract should be an extension from a previous 1-year HUC contract from Roc Oil in 2018. Hence, we are undoubtedly positive on this new contract, as it not only signifies DAYANG’s competitiveness to secure new contracts, but also its quality work delivery resulting in client retention. We believe this contract should fetch roughly mid-teens EBIT margins.

Outlook moving forward. The contract award should lift its current order-book to slightly above RM3b. This contract aside, further contract awards could still come from possible partial wins in its I-MCM tenders from Petronas, with gross value estimated to be around RM4b, and award date expected to be late-2019. Meanwhile, the company had also recently announced its proposed debt restructuring, entailing; (i) a 1-for-10 rights issue, (ii) private placement of up to 10% of total issued shares, (iii) issuance of Sukuk of RM682.5m and subscription of PERDANA’s RCPS (refer to our report dated 21 May 2019 for further details). Overall, this is expected to reduce DAYANG’s net gearing to 0.66x (from 0.72x currently), as well as diluting its share base by ~20%. The exercises are expected to be completed by 4Q19, pending shareholders and authorities’ approvals.

Maintain UNDERPERFORM, with an unchanged TP of RM0.80, implying Forward PBV of 0.7x (in-line with 0.5SD below its 5-year mean) and Forward PER of 8x. While we like the company for its outstanding management and quality work delivery, being one of the most established and efficient players within the local offshore maintenance space, we still remain slightly wary given the upcoming share-base dilution, coupled with the recent loss-making quarterly results, which could act as potential drags. Nonetheless, we believe the size of the rights issue is much more palatable as compared to previous rights exercises in the oil and gas sector (e.g. SAPNRG, VELESTO), and hence, we do not expect an overly prolonged overhang, if any. Post-award, we made no changes to our FY19-20E earnings, as the contract is still within our replenishment assumption of RM1b (this being the first win for the year). Since our “take-profit” UNDERPERFORM call in March, the stock has retraced 46%. Overall, our calls on DAYANG for the past twelve months have yielded total returns of over 180% (includes both OUTPERFORM and UNDERPERFORM calls). Risks to our call include: (i) stronger-than-expected work orders, (ii) increase in lump-sums of variation orders, (iii) higher-than-expected vessel utilisation, and (iv) falling through of corporate restructuring exercise.

Source: Kenanga Research - 27 May 2019