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Tuesday, December 16, 2014

Dayang Enterprise Bhd - Bardegg-2 and Baronia EOR EPCC win

News Yesterday, DAYANG announced that it had been awarded a contract; worth RM280m; to provide major brownfield modification work for the Bardegg-2 and Baronia Enhance Oil Recovery (EOR) Development Project

The duration of the contract is c.36 months (effective Dec-14 to Dec-17).

Comments We are unsurprised by the news as we were aware that DAYANG was pursuing this project, and we are positive as it signals a new source of income for the Group.

Management guidance is for margins to be in-line with that currently being recorded by the Group (i.e. c.20-23%); which is a premium to the rest of the industry margins which typically stand at the single digit and/or low teens. We suspect that the financial impact of this project could only be captured in FY16-17 as profits are typically back-loaded.

Outlook Order book currently stands at RM4.2b; with the Sarawak & Sabah Shell and Petronas Carigali hook-up & commissioning (HUC) works taking up the bulk (~74%).

DAYANG is currently tendering for 2 HUC prospects which we suspect will only be awarded next year.

PERDANA, its associate, should see flattish contribution in FY15 as new vessels will only be delivered in FY16.

Forecast Even though we are positive on the longer-term prospects of the company; we understand that we have been overly optimistic on the pace of the new HUC contracts for FY14-15.

As such, we i) reduce the pace of both the Sarawak-Shell and Petronas Carigali work; ii) reduce our forecasted FY15 EBIT margins to 23% (from 24%) for the Pan-Malaysian HUC contracts. and iii) reduced the associate contributions from PERDANA as we have also fine-tuned our earnings on the latter.

Overall, this reduces our FY14-15 net profit forecasts by 6.6-21.4%. We highlight that our estimates are at a 6.8%-15.4% discount to consensus forecasts, but this is as we believe being conservative at this juncture is imperative.

Rating Downgraded to MARKET PERFORM from OUTPERFORM

Valuation We have reduced our target CY15 PER 10x (from 12x) in-lieu of the continual sector de-rating. We have ascribed a premium over other small-cap stocks (7-9x) given it is one of the Pan Malaysian HUC winners.

We highlight that this valuation is close to DAYANG’s historical -0.5 standard deviation level for the stock; whilst its trough PER valuation is 6x.

Our changes result in our target price falling to RM2.23 (from RM3.40).

Risks to our Call (i) An upturn in crude oil prices that will buoy the sentiment of the sector, and (ii) better-than-expected contract execution and margins.

Source: Kenanga

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