Dayang Enterprise Holdings Bhd (Dec 22, RM1.54)
Initiating with a buy at RM1.58, target price RM2.20: Since our introduction note on Dayang issued on Oct 21, the stock has gained some 20.6% and also seen slightly increasing volume. As we believe the company to be gaining traction with the institutional investor community, we are hereby formalising coverage on the stock.

To reintroduce, Dayang’s core business is in the provision of offshore topside maintenance services, minor fabrication and offshore hook up and commissioning. The company currently has a healthy order book of RM500 million to last it into 2011 and is bidding for some RM2 billion of jobs of which it hopes to secure RM350 million over 2010.

Despite 2009 being a rough year for service providers, Dayang has continued to show steady profits and stronger-than-peer margins. Maintenance work margins are high as Dayang owns most of its equipment as well as uses its own vessels for jobs, hence internalising a lot of costs. We note that Dayang’s margins are better than that of Petra Energy (10%-15% typically) as well as SapuraCrest’s (15%-25%) vessel and maintenance segment.

Our intrigue with Dayang also lies with the 40% acquisition of Syarikat Borcos Shipping which will, by end next year, have 39 offshore support vessels with a niche in fast crew boats. The purchase came with a profit guarantee of RM65 million from the vendor for FY10 and this bumps up FY10 numbers by some 44% based on our estimates.

However, we highlight that Borcos’ high gearing could have negative repercussions later on like a rights issue post-Borcos’ planned listing next year. Also, in view of a slightly unstable AHTS (anchor handling tug supply) market, we are conservative with FY11 growth estimates.

Even with the recent 20.6% increase, we view that Dayang still holds value and trading at 8.4 times on FY10 earnings per share (EPS) is very reasonable. Before moving forward, we do first highlight key risks of the company which are: (1) margin squeeze in its maintenance work could increase, (2) oversupply in the vessel market could see Borcos’ utilisation decline, and (3) over-dependence on Petronas could result in choppy earnings.

With that out of the way, we view that pegging Dayang to a 12 times price earnings (PE) is fair for now and also on par with industry valuations. This derives a target price of RM2.20. To note, Dayang also typically pays out commendable dividends. — ECM Libra Investment Research, Dec 22