This article first appeared in The Edge Financial Daily on December 19, 2017

Dayang Enterprise Holdings Bhd 
(Dec 18, 59.5 sen)
Maintain outperform call with an unchanged target price (TP) of 73 sen: We expect Perdana Petroleum Bhd’s share price to sharply correct from its September 2015 last traded price of RM1.54 upon relisting yesterday after the book value declined by 20% with accumulated RM160 million losses in the past two years. Offshore support vessels (OSV) peers are trading at 0.2 times to 0.5 times the price-to-book value (PBV). 

Our fair value of 25 sen is based on 0.4 times the PBV, implying an 84% downside. Despite it being so, Dayang Enterprise Holdings Bhd’s 55% stake in Perdana makes merely 16% (about 12 sen) of our sum-of-parts (SoP). Still we maintain an outperform call with a TP of 73 sen for earnings recovery play in financial year ending Dec 31, 2018 (FY18).

Dayang’s 60.5%-owned subsidiary, Perdana (not-rated) announced that the company had resumed trading yesterday. Last Thursday, Perdana announced that the public shareholding spread has been regularised to 20.016%, fulfilling Bursa Malaysia’s requirement in which approval was granted to relist with a lower public shareholding spread following the completion of Dayang’s 0.302:1 distribution of dividend in specie. 

Perdana was suspended on Sept 30, 2015 after the public shareholding spread was reduced to less than 10% upon completion of the mandatory general offer by Dayang.

Note that the reference price of Perdana for the distribution of dividend in specie by Dayang is set at 96 sen, equivalent to its FY16 book value (BV) per share. As of third quarter ended Sept 30, 2017 (3QFY17), its BV per share has dropped further to 72 sen due to its loss-making nine-month FY17 (9MFY17) results and RM50 million impairment. 

As part of our SoP valuation of Dayang, we are valuing Perdana at 25 sen per share pegged to 0.4 times FY18 PBV which implies an 84% and 65% downside to its last traded price of RM1.54 and its 3QFY17 BV per share.

Following that, Perdana is targeting to complete its 10% private placement within the next six months whereby the proceeds will be used as working capital and repay borrowings. 

This would lower down Dayang’s effective stake in Perdana to 55%. Perdana is expected to stay in the red for FY17 (9MFY17 core net losses at RM62 million with an average utilisation rate of 53%). 

Moving forward, Perdana is looking to improve its vessel utilisation to  more than 80% premising on the strategy tie-up with Dayang, order book of RM237.7 million (two to three years’ visibility) and tender book valuing from RM270 million to RM350 million (14 new charter contracts ranging from three months to five years) in Malaysia and the Asean region.

Despite the expected downside pressure for Dayang, its 55% stake in Perdana makes merely 16% (about 12 sen) of our SoP. 

All in, we reiterate our outperform call on the counter premising on earnings recovery in FY18 backed by a RM3.3 billion order book and narrowed stake in loss-making Perdana.

Risks to our call include weaker-than-expected hook-up and commissioning and topside major maintenance work orders, and prolonged downturn in the OSV market. — Kenanga Research, Dec 18