Dayang Enterprise Holdings - Capital Raising

Date: 21/05/2019

Source  :  KENANGA
Stock  :  DAYANG       Price Target  :  1.05      |      Price Call  :  SELL
        Last Price  :  1.87      |      Upside/Downside  :  -0.82 (43.85%)

DAYANG announced a series of proposed corporate exercises, consisting of a rights issue and a private placement to raise a total of ~RM187m, primarily for borrowings repayment and sinking funds. The exercises are expected to dilute DAYANG’s share base by ~20%, and reduce its net gearing to ~0.6x (from 0.8x). While this was not a surprise to us, we maintain our UP call with a lower TP of RM1.05, anticipating an overhang given share base dilution.

Raising capital for debts repayment. Last week, DAYANG announced a capital-raising exercise entailing; (i) proposed rights issue, on the basis of 1 right for every 10 shares, at a later-determined issue price, and (ii) proposed private placement representing approximately 10% of the total issued share capital, at a later-determined issue price. Based on an illustrative issue price of (i) RM0.80 per share for the rights issue, and (ii) RM1.14 per share for the private placement, the exercises are expected to raise approximately up to RM187m – most of which will be used for debt repayments and sinking funds (refer tables below for breakdown details). The proposals are expected to be completed by 4Q19.

Sukuk programme and PERDANA’s RCPS. The proposals are undertaken in conjunction with a proposed Sukuk issuance of RM682.5m, as part of DAYANG’s debt restructuring scheme. Of the Sukuk proceeds raised, RM365m will be advanced to PERDANA (60.5%-owned listed subsidiary) for the settlement of its borrowings, with the remaining proceeds used as a refinancing of DAYANG group’s borrowings. In turn, PERDANA has also simultaneously announced a proposed renounceable rights issue of new redeemable convertible preference shares (RCPS), intending to raise a minimum of RM445m, to be used for the repayment of DAYANG’s advances.

Impact from the exercises. We do not find the announcements surprising given PERDANA’s involvement with the Corporate Debt Restructuring Committee (CDRC) of Bank Negara, coupled with management’s repeated guidance over the past several quarters. Based on the illustrative issue prices, the proposals are expected to dilute DAYANG’s share base by approximately 20%, while reducing group net borrowings by 8% to RM798m, thus lowering net gearing to 0.6x, from 0.8x currently. This would result in approximately RM6.6m interest savings per annum. At PERDANA’s level, the RCPS is expected to dilute its share base by 2.3-2.5x (depending on final issuance basis), also resulting in a massive 72% reduction of its borrowings to RM178m, thereby lowering its net gearing to 0.2x, from 1.4x previously.

Maintain UNDERPERFORM, given a possible sentiment overhang given share base dilution following the proposed exercises. The company is also expected to release its quarterly results later this week, which we believe could see sequentially weaker earnings given last quarter’s high lump-sum work orders. Nonetheless, we believe the size of this 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 shares overhang. Our SoP-TP is trimmed to RM1.05 (from RM1.20 previously) as we lowered our ascribed valuation on PERDANA to 0.4x PBV (from 0.5x previously), given the massive dilution. This valuation is also in-line with trading valuations of other offshore/upstream peers (e.g. MHB, SAPNRG). Our TP implies Forward PBV of 0.9x (roughly close to - 0.5SD of its mean), as well as Forward PER of 10x. Note that we still have yet to take into account the full share base dilution from the proposals, pending finalisation of the issue prices to arrive to a theoretical ex-trading price. That said, our TP would arrive to a theoretical ex-all FD-TP of RM0.89. Since our “take-profit” UNDERPERFORM call in March, the stock has retraced 33%. Overall, our calls on DAYANG for the past twelve months have yielded total returns of over 165% (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 - 21 May 2019

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