Dayang Enterprise Holdings Bhd
(Dec 16, RM2.43)
Donwgrade to “market perform” from “outperform”, with a target price of RM2.23: Yesterday, Dayang announced that it has been awarded a RM280 million contract to provide major brownfield modification work for the Bardegg-2 and Baronia enhanced oil recovery (EOR) development project. The duration of the contract is 36 months (effective December 2014 to December 2017).
We are unsurprised by the news as we were aware that Dayang was pursuing this project, and we are positive as it signals a new source of income for the group.
Management guidance is for margins to be in line with those currently being recorded by the group (20% to 23%), which is a premium to the rest of the industry margins, which typically stand in the single digits and/or low teens. We suspect the financial impact of this project will only be captured in financial year 2016 ending December (FY16) and FY17 as profits are typically backloaded.
Even though we are positive on the longer-term prospects of the company, we understand that we have been overly optimistic on the pace of the new HUC contracts for FY14/FY15. As such, we: (i) reduce the pace of both the Sarawak Shell and Petronas Carigali work; (ii) reduce our forecast FY15 earnings margins before interest and tax to 23% (from 24%) for the Pan-Malaysian HUC contracts; and (iii) reduce the associate contributions from Perdana as we have also fine-tuned our earnings on the latter.
Overall, this reduces our FY14/FY15 net profit forecasts by 6.6% to 21.4%. We highlight that our estimates are at a 6.8% to 15.4% discount to consensus forecasts, but this is as we believe being conservative at this juncture is imperative.
We have reduced our target 2015 price-earnings ratio (PER) to 10 times (from 12 times) in view of the continual sector derating. We have ascribed a premium over other small cap stocks (seven to nine times) given it is one of the Pan Malaysian HUC winners.
We highlight that this valuation is close to Dayang’s historical -0.5 standard deviation level for the stock, while its trough PER valuation is six times. Our changes result in our target price falling to RM2.23 from RM3.40. — Kenanga Research, Dec 16
This article first appeared in The Edge Financial Daily, on December 17, 2014.