Dayang set for strong earnings rebound

PETALING JAYA: CGS-CIMB Research is bullish on the prospects of oil and gas services provider Dayang Enterprise Holdings Bhd, driven by its growth potential over the next two years and strong performance of its unit, Perdana Petroleum Bhd.

Perdana Petroleum, a 64%-owned subsidiary of Dayang, reported a strong set of results for the second quarter of the year (2Q23), which saw a return to profitability, on top of a near-tripling of revenue due to higher vessel utilisation.

The research unit said the margin expansion in 2Q23 clearly demonstrated the group’s high operating leverage from improvements in overall vessel utilisation and charter rates.

It also said Dayang is anticipating vessel utilisation rates to improve further to 80% in 3Q23 from 69% in 2Q23, before normalising to approximately 60% in the final three months as the monsoon season sets in.

“Since mid-July, Dayang has also announced a slew of contract extensions for its existing core operations, with unit rates being 20% to 25% higher than those in the initial period for these long-term contracts, which were clinched in 2018,” reported CGS-CIMB Research.

Its outlook for the group is further encouraged by the higher rates that have been locked in, believing that it bodes well for Dayang’s margins moving forward.

Additionally, it said Dayang had submitted bids for the Asset Integrity Backlog Clearance (ABC) tender last month, estimated to be worth RM4bil to RM5bil, with awards slated for the end of this year.

CGS-CIMB Research reported that for the first six months of this year (1H23), subsidiary Perdana Petroleum’s normalised net profit came in at RM17.2mil, swinging over from a loss of RM18.2mil in 1H22.

This was better than the estimated contributions the research outfit imputed into its forecasts for Dayang, given Perdana Petroleum’s sharp turnaround in profitability.

“Following a disappointing 1Q23, Dayang’s earnings look set for a strong rebound from 2Q23 onwards, as the teething issues from a change in contracting strategies by its client have been largely resolved.

“Moreover, execution of its work schedule for the rest of the year appears to be on track, while the interim farm-in from the ABC contract should add incrementally to revenues from August 2023 onwards,” the securities firm projected.

Underpinned by upside potential to earnings from sustained strength in Perdana Petroleum’s operations, a successful tender for the ABC contract and better-than-expected margins for its core operations, CGS-CIMB Research is reiterating its “buy” call on Dayang with a target price of RM1.70.

Risks to the call include possible delays in the rollout of work orders due to vessel shortages, given the current tight supply conditions and prolonged resolution to the change in its client’s contracting strategy.

This, the research house said, could result in weaker-than-expected earnings for the group.