Initiate coverage with BUY, MYR1.53 TP based on 14x FY23F P/E, or +1SD from its 5-year mean (2% ESG discount), 34% upside. As an experienced upstream maintenance player, Dayang Enterprise is set to benefit from the 5-year contract renewal cycle starting next year. While we expect earnings growth of 18-107% in FY22-24F, led bystronger hook-up & commissioning (HUC), and maintenance, construction and modification (MCM) work orders, the potential win of the Safina project could drive fleet rejuvenation, backed by its strong balance sheet.
Solid work orders, potential replenishment in FY23. As of end-2Q22, Dayang’s orderbook stood at MYR1.7bn, of which Petronas’ MCM and integrated HUC (i-HUC) contracts contributed c.76%. With higher spending from Petronas and other clients, we expect i-HUC and MCM work orders to ramp up. These contracts are due for renewal in FY23, and we see a potential replenishment of c.MYR3.5bn, aside from current tenders worth MYR500m. Management guided that manpower working permits have been largely resolved, with most workers under 6-month permits.
Margin improvement. Overall margins could improve in 2022-2024 on the back of a better operating environment (potential rate revision and higher vessel utilisation) and the relaxation of quarantine requirements and SOPs. Note that Dayang’s GPM (ex-impairments) was at 12% in 2021, and could return to FY20’s 32% this year. We believe it will take time for its margin to resume to pre-pandemic levels of 40-47% (2018-2019), especially when the company is facing growing pressure in logistics and equipment costs.
Perdana Petroleum (Perdana) to break even next year. 63.7%-owned Perdana’s vessel utilisation rate was at 47% in 1H22 – we expect this to improve in 2H22 and 2023. The full-year utilisation rate is targeted at high >50% (FY21: 49%) levels. Most vessels are on spot charters, and daily charter rates are improving. Management expects overall OSV demand to pick up, driven by stronger demand for drilling, plug & abandonment (P&A), and underwater services. Over half of Perdana’s vessels will be chartered internally to Dayang to execute its in-house projects. We think Perdana will see minimal losses in FY22 (FY21 core loss: MYR79m) and deliver a small profit in FY23.
Project Safina could drive fleet rejuvenation. With an average fleet age of 12 years, Dayang is looking to kick-start its fleet renewal programme this year. It participated in Petronas’ Safina project, involving 16 OSV newbuild charter contracts. We believe it stands a good chance of winning the project, and is capable of growing its fleet by least 2-4 vessels, as its net gearing was at 0.08x as of 4Q21. Downside risks: Lower work orders, softer oil prices – which could limit clients’ spending – and higher operating costs.
