This article first appeared in The Edge Financial Daily on January 23, 2019

Daya Materials Bhd
(Jan 22, 1 sen)
Maintain neutral: Daya Materials Bhd announced a debt restructuring last Friday, incidentally also a precursor to its Practice Note 17 regularisation plan involving a proposed capital reduction and a proposed rights issue of new shares with free detachable warrants, among others. Under this current RM32.46 million deal, 534 million new shares will be issued at 2.5 sen per share to Perfect Propel Sdn Bhd (PPSB) in place of RM13.35 million in debt assumed; RM18.69 million will be set-off against subscriptions from the proposed rights issue; and RM420,000 will be satisfied in cash.

With RM246.12 million in total borrowings as at Sept 30, 2018, and in particular RM83.1 million in redeemable convertible unsecured bonds already due, one can expect a significant ballooning of its share base when the full regularisation plan is announced. A significant encouragement remains — the company is profitable operationally. We are cautiously optimistic about Daya Materials’ restructuring and turnaround but reserve comments pending details of the full plan. Our target price remains under review but our “neutral” call is maintained. Earnings estimates continue to have significant downside biases.

The part one of the debt restructuring is related to the now-terminated RM270 million contract awarded by Yuk Tung Construction Sdn Bhd to Daya CMT Sdn Bhd, a 51%-owned subsidiary of Daya Materials, which was then subject to a separate collaboration agreement with a third party. After terminating the contract, the third party agreed to pay a principal sum of RM40 million to Daya CMT, presumably for advances in lieu of works undertaken. A subsequent mutual settlement agreement signed in December 2016 saw the group agreeing to assume RM24 million of the RM40 million owed by the third party to Daya CMT, with the former now directly indebted to the group.

The part two of the debt restructuring is a result of an RM18.6 million loan undertaken from PPSB in mid-2015 with an interest rate of 8.85% per annum to partly finance the acquisition of Sime Daya 1, an offshore subsea construction vessel. The total owed is now RM20.7 million inclusive of interest. Take note that PPSB is a 49% shareholder of Daya CMT. PPSB’s most notable personality is Datuk Low Keng Siong, an executive director of Bursa Malaysia-listed Thriven Global Bhd.

The part three of the debt restructuring will see Daya CMT proposing to declare dividends amounting to RM24 million — covering the part one of the debt restructuring — of which RM12.24 million will be payable to the group and RM11.76 million to PPSB in proportion of their respective shareholdings in Daya CMT. The group will then assume the RM11.76 million owed to PPSB, thereby increasing total amounts owed to RM32.46 million. — PublicInvest Research, Jan 22