Dayang’s 3Q20 core profit of RM43.1m (QoQ: -RM1.6m, YoY: -61.1%) and 9M20’s sum of RM62.4m (-61.1% YoY) was above our expectations (156%) but within consensus (75%), due to higher than expected deferred work orders from its IHUC and PM-MCM contracts from 2Q20 and successful implementation of cost optimisation measures. Its Offshore TMS operating profit stood at RM54.0m (+145.3% QoQ, -58.4% YoY), a big improvement from 2Q20. Despite its commendable 3Q20 performance, we foresee challenging times ahead for Dayang going forward as we do not anticipate a material capex revival from Petronas in FY21. Furthermore, we expect 4Q20 results to be significantly weaker than 3Q20 due to the monsoon season. Hence, we are maintaining our HOLD call on Dayang but with a higher TP of RM1.10 based on 9x (unchanged) FY21 EPS after increasing our net profit forecast for FY20-22F by 100/32/13% to account for its better than expected cost optimisation measures.

Above expectations. Dayang’s 3Q20 core profit of RM43.1m (QoQ: -RM1.6m, YoY: - 61.1%) and 9M20’s sum of RM62.4m (-61.1% YoY) was above our expectations (156%) but within consensus (75%), due to heavier than expected deferred work orders from for its I-HUC and PM-MCM contracts from 2Q20 and successful cost optimisation measures. No dividends were declared during the quarter, none expected for the year. 9M20 core profit of RM62.4m was derived after adjusting for impairment losses from Perdana amounting to RM18.5m, unrealised foreign exchange gain amounting to RM0.9m and other items amounting to RM0.4m.

QoQ: Dayang’s core profit of RM43.1m (QoQ: -RM1.6m) in 3Q20 was primarily attributable to deferred work orders from 2Q20 due to MCO and successful cost optimisation measures implemented.

YoY: The 35.6% and 61.1% YoY declines in Dayang’s revenue and profit were primarily attributable to lower spending my Petronas due to low oil prices as a result of Covid-19 and weaker revenue and profit from Perdana.

YTD: Core earnings declined to RM62.4m (-61.1% YoY) due lower work orders for its I-HUC and PM-MCM segments due to the coronavirus and the global oil market glut.

Outlook. We believe that the prospects for upstream services players remain tepid as we believe that Petronas would continue to remain prudent on its capex spending. We believe that the fundamentals of the oil market are still weak despite the positive sentiments brought about by the effectiveness of several vaccines. Petronas is doing a great deal to assist the government with its dividend payments but we opine that it will be a stretch on its cash flows. Hence, we expect Petronas to continue with its capex cuts and this will result in lower work orders to maintenance players like Dayang. However, we have become more positive on Dayang as its cost optimisation measures are currently bearing fruit.

Forecast. We upgrade our earnings by 100/32/13% for FY20-22F to account for its better than expected QoQ margins as a result of successful cost optimisation measures.

Maintain HOLD with higher TP of RM1.10. We maintain our HOLD call with a higher TP of RM1.10 based on an unchanged target PE of 9x (-0.3SD below 2-year mean). We believe that Petronas would need to start spending more on capex for us to warrant a BUY on Dayang.

Source: Hong Leong Investment Bank Research - 24 Nov 2020