Dayang Enterprise Holdings Bhd
(June 26, RM2.26)
Maintain market perform with an unchanged target price (TP) of RM2.50: The extraordinary general meeting (EGM) of Dayang Enterprise will take place in Miri, Sarawak on July 2 to seek approval for the proposed acquisition of a 5.74% equity interest in Perdana Petroleum Bhd (market perform; TP: RM1.55) from Affin Hwang Asset Management Bhd. The approval of the proposal will bring Dayang’s stake to 38% from the current 32%, triggering a mandatory general offer (MGO) at RM1.55 per share. 

According to the tentative timetable in the circular attached earlier, the closing date of the proposed MGO will be some time during mid-August this year. In the event of acceptances for the offer not exceeding the 50% + 1 share level, an upward revision in offer price is highly unlikely given near-term earnings risk for the target company and it may seek to slowly gain more control through open market and off-market transactions.

Post the meeting with management, we gather that Dayang does not intend to privatise Perdana through the MGO. The listing status of Perdana is likely to be maintained to ensure access to funding from the equity capital market to finance its long-term expansion plans. Instead, Dayang intends to gain a controlling stake of 50% +1 share in the company to better manage its fleet of vessels, ensuring sufficient availability of vessels, for its Pan Malaysia hook-up and commissioning (HUC) contract. Currently, Dayang is already in discussion to add another member to Perdana’s board with two of its existing non-executive members to have more hands-on control of the company. On top of that, we believe it is not likely for the current management team of Perdana to be subjected to significant changes due to their expertise in the marine business.

Business operations of Perdana are expected to remain status quo if Dayang were to gain a controlling stake. The delivery of two 500-men accommodation work barges to be delivered in 2016 will most probably be delayed for six months, allowing for more breathing space for the target company to secure charter contracts in the challenging offshore support vessel market. Aside from that, the group has also made clear of its intention to make Perdana syariah-compliant by converting its US dollar borrowings to Islamic ringgit borrowings. This we believe will be a positive catalyst for Perdana as it will have access to government-linked companies and other syariah investors.

HUC activities appear to be weaker with Shell Sarawak running slow compared to a year ago, and confirmed orders from Petronas Carigali Sdn Bhd remaining uncertain. However, things appear to be more positive on its recently secured jobs, namely facilities improvement project contract (RM250 million) and the engineering, procurement, construction and commissioning Bardegg-Baronia (off Sarawak) contract (RM280 million) that still look strong and poised to be on track with its scheduled progress in the coming years. We also believe in the possibility of higher upside on these contracts due to variation orders when the contract undergoes the execution phase, suggesting a potential upside for earnings contribution from these contracts. To recap, we have imputed contract replenishment of RM500 million for both financial year 2015 (FY15) and FY16 for the group earlier. It looks well on track to hit our target with RM400 million tenders submitted and another RM1 billion to be submitted within the next quarter.

While Petroliam Nasional Bhd’s renegotiation of existing contract terms is still ongoing, we believe it is not a major concern as we have already factored in slower revenue recognition from its existing HUC contracts earlier. Moreover, it is believed that the group will only agree to a discount (possibly 10%) if it were to obtain further extensions of contracts in return to protect its interest. Overall, the company’s fundamental remains solid albeit it is not entirely spared from the overall industry slowdown. — Kenanga Research, June 25

This article first appeared in The Edge Financial Daily, on June 26, 2015.