Margins from Dayang’s new contract might be lower than expected

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KUCHING: The project margins in Dayang Enterprise Bhd’s (Dayang) newest contract win from Petronas Carigali Sdn Bhd (PCSB) might be lower than expected when compared to the group’s historical project margins.

In a filing to Bursa Malaysia last Friday, Dayang announced that they had clinched a long awaited contract from PCSB for the provision of maintenance, construction and modification (MCM) services package A (offshore) – Sarawak Oil.

With a contract duration of five years and a one year extension option, the contract win has been warmly received by investors and analysts alike due to its positive effects towards the group’s overall earnings and net assets.

Despite the expected positive effects, the team over at Kenanga Investment Bank Bhd (Kenanga Research) opined that the contract’s margins could be lower than expected due to advances in cost rationalisation exercises.

“Given the rigorous cost optimisation over these few years, the project earnings before interest and tax (EBIT) margins could be lower, estimated at 15 to 20 per cent versus its historical margins of 20 to 25 per cent before the oil prices’ plunge,” explained the research arm in anotev yesterday

Estimating the total contract value at RM1.0 to RM1.5 billion, the research arm was still positive on the development as the contract would provide earnings visibility for the group’s bread and butter business.

With that said, Kenanga Research opted to maintain their earnings forecast for Dayang as they already factored in RM1.5 billion order-book replenishment and earnings from the contract will only contribute meaningfully in FY18.

Meanwhile, Dayang’s subsidiary, Perdana Petroleum Bhd (Perdana), is on track to be relisted in October following the completion of the proposed reduction of Dayang’s stake in Perdana to 60.5 per cent and an increase in its public shareholding spread by 20 per cent via a dividend-in-specie to shareholders of Dayang.

“Furthermore, Perdana has also announced a private placement of up to 10 per cent of the total number of issued shares, which would lower Dayang’s stake in Perdana to 55 per cent.

The corporate exercises are expected to be completed in the fourth quarter of 2017 (4Q17),” added the research arm.

The value of Perdana’s dividend share is expected to be lower than its last traded price of RM1.54 prior to its suspension on September 30, 2015 pending approval from Securities Commission.

All things considered, Kenanga Research maintained its ‘outperform’ call on Dayang with an unchanged target price of RM1.10 pegged to 1.1 times FY18E price book valuation, implying a FY18E price earnings ratio of 12.5 times.