Dayang Enterprise Holdings Bhd
(May 15, RM2.64)
Upgrade to market perform with a higher target price (TP) of RM2.73 from RM1.74: Dayang Enterprise Holdings has proposed to acquire a 5.7% stake worth RM43 million in Perdana Petroleum Bhd from Affin Hwang Asset Management for a consideration of RM66.6 million or RM1.55 per share, which will increase its stake from 29.8% to 35.5%.

If the offer is accepted, a mandatory general offer (MGO) will be triggered for the remaining stake. However, Dayang would like to maintain Perdana’s listing status in contrast to a full privatisation judging from the conservative offer.

A cash offer fuelled by debt financing is highly possible given it is earnings accretive to Dayang, while an Islamic financing option would be considered to maintain its syariah-compliant status.

Dayang will be the biggest hook-up, construction and commissioning (HUCC) player in the local market post-acquisition of Perdana, which better positions the company for the next round of Pan Malaysia umbrella intergrated HUCC contract bidding in 2019 possibly.

The proposed acquisition represents 5.74% interest in the stock and brings Dayang’s stake to 35.5% from 29.8% previously. This will trigger the MGO for the rest of the equity that it does not own if Affin accepts the offer within three months of the offer as stipulated in the contract.

This is expected by the market judging by the share price run-up of both stocks in recent months until their suspension last Thursday. According to Bloomberg, Dayang first bought into Perdana in late 2011. 

The offer price of RM1.55 per share implies an estimated financial year ending December 2016 (FY16E) forward price-earnings ratio (PER) of 11.6 times, which is considered fair but not compelling as it values Perdana at a slight discount to its historical two-year mean PER of 12.1 times.

This acquisition price is more favourable for Dayang’s shareholders as it gives the company exposure to Perdana’s relatively young fleet of offshore support vessels (OSV) to capitalise on long-term opportunities in HUCC contracts locally.

The control over Perdana will make Dayang the largest HUCC player locally, putting it in a better position to take on larger jobs.

From the conservative offer price, we believe Dayang has no intention of taking Perdana private. We believe its objective is to gain greater control (more than 50%) of Perdana while maintaining its listing status.

The move is justifiable from Dayang’s perspective, which allows it to exert greater control over Perdana’s assets while minimising the total amount of funds to be raised.

To note, Dayang’s maximum stake in Perdana should be 75% in order for the acquirer to maintain its listing status.

In order to achieve this, Dayang needs to raise another circa RM445.2 million, assuming the RM1.55 per share offer price remains.

There are three potential scenarios to finance the acquisition of the remaining stake: (i) an all stock offer; (ii) all cash offer funded wholly by bank borrowings; and (iii) a mix of cash (debt) and stock.

We believe option two is the most likely it as it is earnings accretive for Dayang’s FY15 earnings: +7.2% and FY16: +10.6%, compared with an expected dilution in earnings for the other two scenarios as a result of new shares issued.

Moreover, option two will only bump up Dayang’s gross gearing from 0.2 times to 1.1 times in FY16, which is still a manageable level for the company.

While we think the group’s debt-to-total assets ratio will exceed the 33% threshold to remain syariah- compliant, we reckon that it might be apt to take on Islamic loan financing to maintain its status.

It would be a sensible move whereby interest in the stock by government-linked funds could still be maintained post the upcoming corporate exercise.

Financing cost of the potential Islamic loan financing remains unclear for now, but we reckon it will be similar to the group’s current average financing cost of 5% or slightly higher.

While the oil and gas sector’s valuation range may be depressed currently amid a volatile oil market, we believe Dayang deserves to trade at a higher PER valuation with the possibility of it taking significant control of Perdana.

This is due to: (i) the improved long-term prospects of securing larger HUCC contracts; (ii) potentially higher margins with more vessels owned rather than chartered-in; and (iii) a rerating of Perdana’s valuation in the event of a strong sector recovery.

Hence, we  upgrade our TP to RM2.73 from RM1.74 previously, based on 12 times PER which is close to its five-year mean PER of 12.8 times (from 10 times) pegged to FY16 earnings per share due to improved long-term prospects on the possible acquisition of Perdana.

Thus, we upgrade our call on the stock to “market perform” from “underperform”. If the deal does not go through, our target price would have been reduced back to RM1.74 assuming a similar downcycle scenario. — Kenanga Investment Bank Bhd, May 15

This article first appeared in The Edge Financial Daily, on May 18, 2015.