BIMB SECURITIES RESEARCH

MARKET INSIGHT
PP16795/03/2013(031743)

Monday, 2 April, 2012

Initial Coverage Dayang Enterprise

Growing Steadily
Stock Data Bloomberg Ticker Market Cap Issued shares 52-week range (H) 52-week range (L) 3-mth avg daily volume Free Float Shariah Compliant Financial Derivatives Share Performance (%) Absolute vs. KLCI Financial Highlights FYE 31 Dec Turnover (RMm) EBIT Pretax profit Core Net Profit EBIT margin Pretax margin Effective tax rate ROE ROA Net Gearing (x) Core EPS (sen) Core EPS growth PER (%) (x) DPS (sen) Div. Yield (%) NTA/share (RM) Growth ratios Turnover EBIT Pretax profit Core Net profit Share Price Chart DEHB MK 1,127.50 Equity 550 2.25 1.41 1.3 28.0% Y N Altman Z-score YTD price chg YTD KLCI chg Beta Major Shareholders Naim Cendera Holding Ahmad Shahruddin Ling Suk Kiong 5.7 13.7% 4.0% 1.1 34.2% 10.1% 10.0%

BUY
Price RM2.05 Target Price RM2.59

1mth -0.5% -1.8%

3mth 0.3% 9.3%

12mth 0.0% -5.1%

We are initiating coverage on Dayang with a Buy call. Our target price of RM2.59 is based on a PE of 14.5x. With strong business presence within the niche topside maintenance (TSM) and hook-up and commissioning (HUC) activities, the Group continues to enjoy strong recurring income with orderbook of RM1.4bn likely to be boosted further this year in view of upcoming mega tenders. Potential M&A activities which are justifiable by the Groups strong financial position would escalate business diversification and act as re-rating catalyst. Strong niche focus. The Group operates under a business model with a strong focus in TSM and HUC activities. Over the years, the Group has been able to develop its experience and technical skills in the areas and became a strong player within these two business segments. Its marine vessels and minor fabrication units have been integrated to the two main activities to allow greater value extraction for each contract. Solid with recurring income. Supported by long term contracts from PSCs, income is recurring thus buffering the Groups from the industrys cyclical nature. Even during the recent downturn, the Group had been able to register growth, a big contrast from its peers. Strong ordebook with pleasant surprises. An estimated orderbook of RM1.4bn or 3.7x of FY11 revenue should provide strong earnings visibility over the next 3 years. Learning from past trends, possibility is high that revenue generated could possibly double that of the initial estimated value towards the end of the contract period. Orderbook replenishment is bright with a total RM7bn HUC tenders up for grab this year. Looking back, we rate Dayangs chances as superior with strong chances in securing part of the contracts. Strong finances = M&A? Armed with strong finances, M&A is well on the table with further investments in Perdana Petroleum being the closet target. Materialization of this will fast track business diversification and provide room for further re-rating. View and recommendation. Initiate coverage with Buy call at target price of RM2.59 based on PE of 14.5x which is the +1 standard deviation of counters past 3-years PE valuation as we see current huge orderbook of RM1.4bn could see strong replenishment this year and continue reversion of PE trading band back to the level prior to August 11 selldown.

2009 197.0 50.9 52.4 44.8 25.9% 26.6% -14.5% 13.8% 9.7% 0.2 8.1 55.2% 25.2 3.2 1.6% 0.6

2010 255.4 83.2 83.1 67.7 32.6% 32.5% -18.5% 18.2% 12.4% 0.1 12.3 51.2% 16.6 3.2 1.6% 0.7

2011 382.3 111.8 106.6 83.9 29.2% 27.9% -21.3% 16.0% 12.3% -0.3 15.3 -23.9% 13.4 5.0 2.4% 1.0

2012E 433.1 128.7 124.3 98.2 29.7% 28.7% -21.0% 16.6% 12.5% -0.3 17.9 -17.0% 11.5 5.4 2.6% 1.1

2013E 499.9 148.6 143.2 113.1 29.7% 28.7% -21.0% 16.4% 12.7% -0.4 20.6 15.2% 10.0 6.2 3.0% 1.3

54.9% 19.1% 33.6% 55.2%

29.7% 63.5% 58.5% 51.2%

49.7% 34.3% 28.3% 23.9%

13.3% 15.2% 16.6% 17.0%

15.4% 15.4% 15.2% 15.2%

Chiong Tong Chai chiongtc@bimbsec.com.my 03-26918887 ext 175

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2 April 2012

Initial Coverage: Dayang Enterprise

An Overview Founded in 1980 by Mr Ling Suk Kiong and En. Harris Bujang, Dayang based in Sarawak was initially engaged in trading of hardware materials and supply of manpower for offshore O&G industry. 1991 witnessed the Groups foray into topside maintenance activities and was subsequently enrolled into Petronas Vendor Development Programme in 1996. The Groups business activities are predominantly on topside maintenance and hook-up and commissioning activities. Nevertheless, in our opinion the Group has more depth with activities divided into 4 distinct groups i) provision of topside maintenance, ii) hook-up and commissioning, iii) charter of marine vessel and iv) minor fabrication. It has a simple business structure with business segments grouped under 3 wholly own subsidiaries. The Group

DEHB

Dayang Enterprise SB
Started in 1980 and engaged in provision of TSM services, minor fabrication (to support TSM and HUC activities) and HUC activities.

Fortune Triumph SB
Commenced operation in 1999, involved in rental equipment and machinery.

DESB Marine Services SB

Commenced in 2005 and principally engaged in chartering of marine vessels. Currently the Group own 7 vessels (5 workboats and 2 supply vessels) with most of it is to support in-house

activities.

The Executive Directors

Datuk Hasmi Bin Hasnan Non-Independent Executive Chairman Ling Suk Kiong Non-Independent Executive Deputy Chairman Tengku Dato' Yusof bin Tengku Ahmad Shahruddin Non-Independent Managing Director Joe Ling Siew Loung @ Lin Shou Long Non-Independent Deputy Managing Director Harry Bin Bujang Non-Independent Executive Director

Holds various directorships in several companies including Naim Holdings and Sarawak Plantation Bhd Dayang major shareholder: 34.17% through Naim Holdings Founder of the Group Dayang major shareholder: 18.54% Also holds several directorships in other private limited companies in Malaysia Dayang major shareholder: 10.06% Responsible for overseeing and monitoring the management and operations of the Group Dayang major shareholder: 5.05% Co-founded the Group.

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2 April 2012 Milestones Year 1991 Progress

Initial Coverage: Dayang Enterprise

1996 1997 2000

2002 2003 2005

Obtained license from Petronas for the provision of blasting and painting activities Obtained two contracts from Sarawak Shell for Sabah and Sarawak waters Topside structure maintenance services and provision of accommodation and support vessels Appointed into the Petronas Vendor Development Program (VDP) Awarded four contracts by Petronas Carigali and Sarawak Shell Berhad / Sabah Shell Petroluem Company Ltd Awarded four contracts for the provision of maintenance services: from Petronas Carigali (Peninsular, Sabah and Sarawak), Sarawak Shell (Sabah and Sarawak) and ExxonMobile (Peninsular) VDP contracts extended for an additional five years to 2007 Diversify into the marine business with DESB Marine Services Sdn Bhd Dayang Pertama (maintenance and work vessel) was built Awarded a 5 year contract by Petronas Carigali, Sarawak and Sabah operation for topside structural maintenance Dayang Pertama completed and delivered in April 2005 Dayang Maju was purchased and delivered to PCSB Second Workboat Dayang Berlian completed Awarded a 3 + 2 contract by Sarawak Shell Berhad/ Sabah Shell Petroleum Company Ltd Dayang Zamrud was delivered Dayang Nilam was purchased Awarded a 2 year contract by Petronas Carigali Sdn Bhd Sarawak & Sabah operations for Integrated Minor Maintenance Activities Awarded a 3 year contract by Murphy Sabah Oil Co. for Provision of Topside Maintenance Services for Murphy's Sabah Production Operations Dayang Zamrud was delivered Awarded a 3 year contract for time charter of Dayang Zamrud for well reservoir management to Brunei Shell Petroleum Company Sdn Bhd Awarded a Work Order from Petronas Carigali Sdn Bhd for HUC of Tangga Barat Drilling Riser Platform(TBDR-A), Tangga Barat Flare Platform(TBFP-A) and Bridges for Tangga Barat Cluster Development Project Phase 1 Awarded a 5 year contract from Sarawak Shell Berhad for Provision of TSM for SSB/SSPC Facilities Awarded Work Orders by Petronas Carigali Sdn Bhd for HUC of Resak Host Tie-In for Tangga Barat Development Project, HUC for Duyong Revisit IV Project and Provision of Interim TSM for Petronas Carigali Sdn Bhd-PMO Awarded Work Orders from Petronas Carigali Sdn Bhd for HUC of Tangga Barat Central Processing Platform (TBCP-A) and HUC for Bokor Development Project Completed 1:4 bonus issue Secured TSM contract from Petronas worth RM802m Contract extension from Murphy worth RM100m Took up 11.5% stakes in Perdana Petroleum Secured a 3 + 1 + 1 TSM contract worth RM125m from Talisman Extension of time charter for Dayang Zamrud for 4.5 year worth RM85m

2007

2008 2009

2010

2011

2012

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2 April 2012 Business Activities

Initial Coverage: Dayang Enterprise

While the Groups businesses are divided into 4 distinct areas, operationally they are well integrated with marine vessels and minor fabrication supporting the activities generated by TSM and HUC segments. This synergetic integration would allow greater cost saving as well as to allow the Group to extract maximum value from contracts secured. i. Topside Maintenance

Bread and butter. This segment represents the bread and butter for the Group, largely focusing on topside structures including substructures in the main deck, helideck, pipes, valves, electrical and instrumentations. Looking at the life cycle of each platform, we reckon that the level of activities will increase along with aging asset, a phenomena that is happening to Malaysians platforms. With domestic upstream oilfield development now getting a strong boost from Petronas domestic investment initiatives, we expect there to be increasing number of platforms requiring such services with complexity ranging from simple satellite facilities to complex deepwater structures. Long term contract and recurring income. Contracts are normally awarded on a long term basis of 3-5 years plus extension options by PSCs with each covering certain geographical waters in Malaysia. Value of job order during the contract period could be different from the initial estimated value by the Group as it only covers the primary term also because contract is awarded based on call-up basis with no guarantee on value and timing of job order. Typically, TSM activities can also be divided into routine or scheduled maintenance and breakdown or emergency maintenance. Higher than expected contract value. From past experience, at the end of each contract, Dayang is able to generate 1.5x to 2x of revenue higher than the initial estimated contract value. To this end, we believe ongoing and future contracts would continue to generate higher than the estimated contract value driven by, i) there are increasing number of offshore platforms in Sabah and Sarawak waters due to exploration and development boom and ii) part of Petronas' RM300bn 5 year capex will be allocated to the areas of asset integrity, maintenance and HSE programme which will push the demand for platform maintenance, particularly the aging ones.

ii. Hook-Up and Commissioning Another long term and recurring segment. This involves the provision of interconnection and interfacing of systems such as structures, modules, equipment and commissioning of systems for offshore platforms. Same as TSM, contract is awarded on call up basis with extension option. More in the pipeline. We are expecting this segment to see increasing contribution as there are two major long term HUC contracts with an estimated value of RM7bn up for grab this year by Petronas Carigali (estimated RM4.5bn) and Shell (estimated RM2.5bn). The main incumbent major contracts holders include SapuraCrest, Shahpadu and Petra Energy. We expect these contracts will be awarded according to current format i.e to a few selected contractors and expect Dayang to secure part of the contracts. Even if the Group is only able to secure 10% of the contracts it will boost ordebook materially by about 50%. We view Dayangs chance as solid boosted by, i) its strong execution track record, ii) the advantage of being a Sarawak based company and iii) access to Perdana Petroleums vessel fleet to support additional works.

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2 April 2012

Initial Coverage: Dayang Enterprise

Hook-Up and Commisioning

iii. Marine Vessels Growing fleet. The company started its marine operation in 2003 with the incorporation of DESB Marines Services SB. Since its listing, the company has added 4 vessels into its fleet bringing the total to 7 (6 maintenance and work vessel, 1 supply boat and landing craft). With the access to Perdana Petroleums vessels, Dayang could possibly scale back its vessel fleet expansion drive. Mainly for in-house. Except for Dayang Zamrud which recently secured a contract extension worth RM85m to support Shell Bruneis well reservoir management activities, the remaining six vessels are rd mainly deployed to support in-house activities or otherwise chartered out to 3 party under short term charter contract. Currently, all vessels are being utilized and we expect utilization will continue to run tight on the expectation of increasing activities and expect the Group will outsource some of its vessel requirements to Perdana Petroleum. Vessel Profiles:Vessel Dayang Topaz Type Maintenance/Work Vessel Year Build 2011 Brief Specs Length: 80.4m HP: 2 x 2012bhp 2 Deck Space: 700m DWT: 6600MT Length: 75m HP: 2 x 1800bhp 2 Deck Space: 700m DWT: 3475MT Length: 55m HP: 2 x 800bhp 2 Deck Space: 376m DWT: 462MT Length: 75m HP: 2 x 2100bhp 2 Deck Space: 700m DWT: 2900MT Length: 75m HP: 2 x 1800bhp 2 Deck Space: 700m DWT: 3440MT Length: 46m HP: 2 x 600bhp 2 Deck Space: 230m DWT: 444MT Length: 46m HP: 2 x 636bhp 2 Deck Space: 308m DWT: 459MT

Dayang Berlian

Maintenance/Work Vessel

2007

Dayang Nilam

Maintenance/Work Vessel

1993

Dayang Pertama

Maintenance/Work Vessel

2005

Dayang Zamrud

Maintenance/Work Vessel

2009

Dayang Maju

Supply Boat/Landing Craft

2005

Dayang Cempaka

Supply Boat/Landing Craft

2011

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2 April 2012

Initial Coverage: Dayang Enterprise

Marine Vessels

M.V Dayang Nilam

iv. Minor Fabrication

M.V Dayang Maju

Small but important. While earnings contribution from this division is small, this remains an important segment enabling Dayang to offer a complete one-stop solution for TSM and HUC services. Activities of this segment revolved around fabrication of piping system, skids and other minor steel structures such as pipe pool, hand rails and platform extension. These activities are currently carried out in its two yards located in Labuan and Kemaman. Over the past few years, the Group continue to invest in expanding its fabrication yards capacity with the latest in its Kemaman yard, on the anticipation of higher activities.

Minor Fabrication

Competitive Strengths/Landscape Proven track record. With business strategies that anchored strongly on TSM and HUC, over the years, the Group has been able to build a strong presence in these two segments. So far, it has serviced more than 300 offshore platforms with clients continue to renew their contracts with Dayang, a strong testament of its projects execution record. Long term relationship. Through its excellent contracts execution, the group has been able to maintain long term relationship with its customers and has so far completed 31 contracts worth RM3.2bn. While we reckon competition is keen, such strong business relationship would provide added competitive advantage in face of competitive bidding, particularly from newcomers. Same goes for the concerns on over-reliant on major customers. Petronas Length of Business Relationship Completed Contracts 19 15 Shell 20 8 Exxon Mobile 9 1 Murphy 4 2 Nippon Oil 4 3

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2 April 2012 Revenue attribution by clients: (total: RM3.2bn) :-

Initial Coverage: Dayang Enterprise

Small but still well modelled. While its business portfolio is rather niche and may not be as diversified as some of its bigger peers in terms of product offering, we still see the Group is able to maximize the value from its contracts. This is especially so as the Group is able to internally source some of the supporting services i.e vessel, fabrication and equipment. Controlled number of players. Competition is somehow controlled by the number of licenses awarded by Petronas, looking at the number of industry players, still we see considerable level of competition within the TSM and HUC segments. Most of its competitors are non-listed local companies with similar business model, the big buys include Sakru Engineering (a subsidiary of Sapura), Petra Energy and Shapadu Energy and Engineering (a subsidiary of Shapadu Corporation) which has strong presence within the segment. Being a company based in Sarawak, we see the company has an added advantage particularly in bidding jobs covering Borneo waters. Financial Highlights Strong orderbook. Current orderbook of about RM1.4bn which makes up of long term contracts and about 3.7x of FY11 revenue provide a strong foundation for the Groups earnings for the next 3 years at least. While our estimates are based on initial contract value estimation, looking at historical trend, there is a strong likelihood that revenue from these contracts will exceed initial estimated value and could surprise us on the upside.
Contract Petronas Carigali: Topside Structural Maintenance Petronas Carigali : Hook-up and commissioning Murphy Sabah : Topside Major Maintenance Brunei Shell Petroleum : Charter of Dayang Zamrud Sarawak Shell & Sabah Shell : Topside Maintenance Contract Talisman Topside Maintenance Contract Total Original Value (RMm) 802 500 150 80 400 125 2,057 Balance of Contract Value (RMm) 680 100 80 80 300 125 1,365 Contract Expiry Feb 2016 Mar 2012 Nov 2012 Feb 2013 (ex 2 years extension option) March 2015 (ex 1 year extension option) Feb 2014

Strong contract pipeline. Being a major player in TSM and HUC as well as its strong execution track record, we see the Group has a strong chance in securing part of the 2 major HUC contracts worth a total of RM7bn by Petronas and Shell which will be awarded this year. The group has targeted an orderbook of RM3bn by FY12 and our estimates have incorporated a 10% value from the 2 major contracts for Dayang with earnings contribution commencing FY13, which is conservative compare to the Groups target.

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2 April 2012

Initial Coverage: Dayang Enterprise Seasonality. Dayangs level of business activities are much reflected by its quarterly results. With TSM, HUC and vessel activities done offshore, business activities are highly dependent on sea conditions. nd rd Typically, business activities will be lower during the first quarter and pick up in the 2 and 3 quarter th before slowing down in the 4 quarter in face of the beginning of the monsoon season. All said, over the past 3 years, 60% of the profit was booked in Q2 and Q3 while Q4 was the weakest with 18%. Growth is well anchored. Earnings enjoyed a CAGR of over 23% over the past 3 years and backed by its strong orderbook and potential new jobs in the pipeline, we expect earnings will continue to grow over the next 3 years albeit at a slower rate due to higher base effect. We expect net margins to sustain above 20% for FY12 as we do not foresee the repeat of the demobilization cost which was incurred in 4Q11. Other Highlights Strong financials = M&A. With its strong balance sheet and cash hoard of over RM200m, the Group is in a strong position to embark on some form of M&A activities. The closet target for this would be further synergetic investment in Perdana Petroleum which it currently owns about 11.53% subsequent from the placement of shares by the latter and open market purchases. Although Perdana Petroleum has made some RM42m one-off impairments and writedown of investment value in the last quarter, Dayang may want to see a clear operational recovery and financial improvement from Perdana Petroleum before committing more resources on this investment. Its investment in Perdana Petroleum will not only open the access to the latters vessel fleet to support its TSM and HUC activities but would also allow faster business diversification. Geographical expansion. The Group first ventured into foreign waters in 2010 through the charter of its marine vessel, Dayang Zamrud in Brunei. As of today, overseas contributions are still minimal with Dayang Zamrud remains as the main overseas operating asset. Its 50:50 joint venture with Alphaone

Engineering Sdn Bhd since 2010 to engage in provision of TSM, HUC and marine vessel but has yet to see any significant result. Success in securing contracts from this venture would definitely act as a re-rating catalyst for the Group.
Views and Valuation. We like the Group for its i) recurring income, ii) strong orderbook of RM1.4bn, iii) strong chances in securing more contracts in FY12, iv) strong balance sheet and v) potential M&A deal which is operationally and value accretive. Initial coverage with a BUY call and target price of RM2.59 based on PE of 14.5x on FY12 EPS of 17.9sen. Our PE multiple is +1 standard deviation of counters past 3years PE valuation which is justified by the expectation of strong orderbook replenishment this year as well as continue reversion of the counters PE trading band back to the level prior to the August 11 sell down across the equity market which has distorted its PE band.

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2 April 2012
DEFINITION OF RATINGS BIMB Securities uses the following rating system:

Initial Coverage: Dayang Enterprise

STOCK RECOMMENDATION BUY Total return (price appreciation plus dividend yield) is expected to exceed 10% in the next 12 months. TRADING BUY Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain. NEUTRAL Share price may fall within the range of +/- 10% over the next 12 months TAKE PROFIT Target price has been attained. Fundamentals remain intact. Look to accumulate at lower levels. TRADING SELL Share price may fall by more than 15% in the next 3 months. SELL Share price may fall by more than 10% over the next 12 months. NOT RATED Stock is not within regular research coverage. SECTOR RECOMMENDATION OVERWEIGHT The Industry as defined by the analysts coverage universe, is expected to outperform the relevant primary market index over the next 12 months NEUTRAL The Industry as defined by the analysts coverage universe, is expected to perform in line with the relevant primary market index over the next 12 months UNDERWEIGHT The Industry as defined by the analysts coverage universe, is expected to underperform the relevant primary market index over the next 12 months Applicability of ratings The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies. Disclaimer The investments discussed or recommended in this report not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of BIMB securities Sdn Bhd may from time to time have a position in or either the securities mentioned herein. Members of the BIMB Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgements as of this and are subject to change without notice. BIMB Securities Sdn Bhd accepts no liability for any direct, indirect or consequential loss arising from use of this report.

Published by

BIMB SECURITIES SDN BHD (290163-X) A Participating Organisation of Bursa Malaysia Securities Berhad Level 32, Menara Multi Purpose, Capital Square, No. 8 Jalan Munshi Abdullah, 50100 Kuala Lumpur Tel: 03-2691 8887, Fax: 03-2691 1262 http://www.bimbsec.com.my

Kenny Yee Head of Research

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