Dayang Enterprise Holdings - PM-MCM Contract From SEA Hibiscus

Date: 02/05/2019

Source  :  KENANGA
Stock  :  DAYANG       Price Target  :  1.20      |      Price Call  :  SELL
        Last Price  :  1.87      |      Upside/Downside  :  -0.67 (35.83%)

We are positive on DAYANG announcing a PM-MCM contract from Hibiscus for the period of 2018 to 2023. Estimated to be worth roughly ~RM200-300m, this brings announced FY18 wins to RM1.8b. No changes to our FY19-20E numbers as contract award are still within our assumptions. Nonetheless, we are still expecting corporate restructuring to be in the pipeline. Maintain tactical UNDERPERFORM call and SoP-TP of RM1.20.

PM-MCM contract from Hibiscus. On Tuesday, DAYANG announced receiving approval for public announcement by SEA Hibiscus Sdn Bhd regarding the award of contract for Pan Malaysia Maintenance, Construction and Modification (PM-MCM) for the year 2018 to 2023. The contract duration is for a primary period of 5 years expiring July- 2023, with an option to extend for a one-year period.

Positive on the contract win announcement. While no contract value was given, as the actual value would ultimately depend on work orders being received by DAYANG, we estimate the contract value to be roughly in the region of ~RM200-300m, fetching EBIT margins within the range of 10-20%. Overall, we are positive on this contract win, highlighting DAYANG’s industry-leading competencies within the offshore maintenance space, and contributing to added earnings visibility for the next five years, with this being the fifth PM-MCM contract secured in 2018 that has been publically announced – summing to a total order book value of roughly RM3b. However, despite the contract being announced only earlier this week after receiving approval for public announcement, note that operations for contract had actually commenced last year. As such, this contract brings DAYANG’s publicly announced FY18 total wins for the year to an estimated RM1.8b. Post-announcement, we made no changes to our FY19-20E numbers, as we deem this contract award to still be within our FY18 replenishment assumption of RM2.3b – implying another 1-2 more FY18 contract wins yet to be announced.

Corporate restructuring in the cards. Under the assistance of the Corporate Debt Restructuring Committee (CDRC) of Bank Negara Malaysia, DAYANG’s 60.5%-owned listed subsidiary PERDANA has hinted an impending comprehensive corporate exercise to be completed within the next 12 months, which may include extension of borrowings, disposal of assets, special issues or placement of shares, and rights issue. Depending on the scheme, there may also be a need to further impair the group’s assets. That said, we do not discount that an upcoming comprehensive corporate restructuring may possibly implicate DAYANG’s shareholders.

Maintain tactical UNDERPERFORM call, with unchanged SoP-TP of RM1.20 – implying 1x PBV, in-line with mean valuations. While we still like the company for its outstanding management, on top of its improved outlook, especially compared to 2-3 years ago when it was incurring losses, we believe recent prices could have been overplayed. Hence, we are sticking to our tactical “UNDERPERFORM” call, advocating a “take-profit” or “sell-on-strength” strategy, with our calls having yielded returns of approximately 140% for the past twelve months (including 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 - 2 May 2019

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