PP 7767/09/2010(025354)

RHB Research
Corporate Highlights Institute Sdn Bhd

Malaysia
A member of the
RHB Banking Group
Company No: 233327 -M

N ew Co ve rage
22 September 2010
MARKET DATELINE

Dayang Enterprise Share Price

Fair Value
:
:
RM2.07
RM2.61
In An Industry Sweet Spot Recom : Outperform
(Initiate Coverage)

Table 1 : Investment Statistics (DEHB; Code: 5141) Bloomberg: DEHB MK

Net Net
FYE Turnover profit EPS Growth PER C.EPS* P/NTA P/CF ROE Gearing GDY
Dec (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (x) (%)
2009 197.0 44.7 12.7 (8.5) 16.2 - 2.2 14.4 13.9 (0.2) 2.4
2010f 258.5 57.6 16.4 28.8 12.6 18.0 2.0 13.1 16.7 (0.1) 2.4
2011f 298.5 70.6 20.1 22.6 10.3 22.3 1.8 9.0 18.2 (0.3) 2.9
2012f 338.5 80.5 22.9 14.0 9.0 27.0 1.5 7.6 18.2 (0.3) 3.3
Main Market Listing / Non-Trustee Stock / Non-Syariah Approved Stock By The SC * Consensus Based On IBES

Issued Capital (m shares) 352.0

♦ Long time oil and gas player. Although only listed on the Bursa main Market Cap (RMm) 728.6
market in 2008, Miri-based Dayang Enterprise has been in the oil and gas Daily Trading Vol (m shs) 0.6
services since 1980. It first traded hardware materials and supplied 52wk Price Range (RM) 1.22-2.20
Major Shareholders: (%)
manpower for the industry, and only later (around 1991) did its service
range expand to provisioning of maintenance services, minor fabrication Naim Holdings Bhd 36.0
operations and offshore hook-up and commissioning. The company’s Tengku Yusof B. Tengku
Ahmad Shahruddin 12.4
latest foray is into the charter of marine vessels via: 1) charter of one of
Ling Suk Kiong 10.0
its workboats to Brunei Shell; and 2) purchase of 40% stake in Borcos.
Vogue Empire S/B 8.5
Joe Ling Sew Loung @ Lin
♦ Investment case. 1) Premium net margins of above 20%, double that of Shou Long 5.3

its industry peers like Petra Energy, Kencana Petroleum and Sapuracrest FYE Dec FY10 FY11 FY12
which typically command net margins at or below the 10% mark; 2) Few EPS chg (%) - - -
notable competitors improve Dayang’s chances of winning contracts; Var to Cons (%) (0.8) (5.2) 16.5

3) Earnings lift from Borcos venture as the industry improves going

PE Band Chart
forward to FY11; and 4) Potential regional expansion, to countries like
Brunei.
PER = 16x
PER = 13x
PER = 10x
♦ Forecasts. We forecast FY10-12 revenue for the topside maintenance
division to be RM240-320m, while marine charter division will earn
RM45.5m p.a.. In terms of margins, we forecast EBIT margins of 26% for
the topside-maintenance division and 23% for marine charter, which
would lead to FY10-12 EBIT earnings of RM63.6m, RM79.4m and
RM89.8m respectively. For Borcos we are conservative and forecast FY10-
12 net earnings to be RM20-45m respectively which will result in RM8- Relative Performance To FBM KLCI
18m associate contributions for Dayang.

♦ Key risks for the stock. 1) High dependence on domestic contracts and
Dayang Enterprise
Petronas could lead to minimal control in project phasing; 2) Weakness in
Borcos earnings could impact earnings; and 3) Continued sluggish
FBM KLCI
contract flows which will lead to another neutral year for the oil and gas
sector.

♦ Valuation. We value Dayang Enterprise at RM2.61/share based on FY11

PER of 13x (inline with the target PER for Kencana Petroleum and
Sapuracrest Petroleum). Our fair value estimate implies a 26% upside to
the stock’s current share price of RM2.07. We like Dayang for its premium Yap Huey Chiang
net margins and we believe the company is currently in an industry sweet (603) 9280 2239
spot as a reputable brownfield services oil and gas player. yaphueychiang@rhb.com.my

Please read important disclosures at the end of this report. Page 1 of 11

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Background

♦ Long time oil and gas player. Although only listed on the Bursa’s Main Market in 2008, Miri-based Dayang
Enterprise, has been in the oil and gas industry since 1980 when it first traded hardware materials and supplied
manpower for the industry. Only later (around 1991), did its service range expand to the current core
operations, provisioning of maintenance services, minor fabrication operations and offshore hook-up and
commissioning. Its latest foray is into the charter of marine vessels business, mainly via a 40% acquisition in
Syarikat Borcos Shipping S/B.

♦ Simple structure. The company runs on a relatively simple structure of three main subsidiaries: Dayang
Enterprise S/B (DESB), DESB Marine Services S/B (DMSSB); Fortune Triumph S/B (FTSB); plus a 40% stake in
Syarikat Borcos Shipping S/B (SBSSB), a marine transportation and support services provider for the offshore oil
and gas industry.

Figure 1: Dayang Enterprises Corporate Structure

Provision of offshore Provision of marine

Topside Maintenance transportation and support
Owner and Charter of Provision of rental
Services, minor fabrication services as well as
marine vessels equipment
and offshore hook-up and integrated land-logistics
commissioning services

Source: Company

♦ Experienced management team that has majority stake in company. Founder and current Executive
Deputy Chairman Ling Suk Kiong boasts 30 years of experience; partner and current Executive Director Harry Bin
Bujang has 28 years under his belt, while Managing Director Tengku Yusof Bin Tengku Ahmad Shahruddin has 20
years of experience in the oil and gas industry. The three of them own about 30% of Dayang Enterprises (directly
and indirectly), while 36% stake is owned by Naim Holdings Bhd, a Sarawak-based developer and contractor,
which was recently in the limelight for being part of joint venture with Samsung Engineering that won the long
awaited Sabah Oil and Gas Terminal (SOGT) project.

Figure 2: Shareholder Listing (@ 30 June 2010)

Nai m Cendera Hol di ngs Bhd

Vogue Empi re S/ B (Control l ed

28% by Harry Bi n Bujang)
36% Tengku Yusof Bi n Tengku
Ahmad Shahruddi n
Li ng Suk Ki ong
5%
Joe Li ng
10% 9%
12%
Publ i c

Source: Company

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♦ Topside maintenance services (TMS) division is star income generator. The company’s first exposure to
topside maintenance services was in 1991, via a Sarawak Shell/Sabah Shell maintenance contract; but the
division’s services have expanded to providing hook-up and commissioning as well. For the past five years
contributions from the division have accounted for more than 90% of revenue and more than 50% of Dayang’s
operating profit. This is likely to continue in the near future judging from its to-date order book (RM1bn) and
tender book (RM3.7bn) which is still very much skewed to both these services (92% of total order book; 100% of
tender book).

Table 2 : Five Year Segmental Breakdown

FYE Dec RM(m) FY05* FY06* FY07* FY08 FY09
Revenue
Topside Maintenance 112.4 108.3 125.3 180.2 196.3
Marine Charter 2.1 24.4 31.3 42.3 62.7
Equipment Hire 2.9 3.1 3.9 5.0 4.2
Elimination (5.0) (26.9) (33.3) (46.4) (66.2)
Total 112.4 108.9 127.1 181.1 197.0

Contribution from Topside Maintenance 100.0% 99.5% 98.5% 99.5% 99.7%

Operational Profit
Topside Maintenance 30.5 23.8 29.9 53.3 30.3
Marine Charter (1.1) 5.2 6.6 7.1 19.0
Equipment Hire 2.0 2.2 2.7 3.7 2.8
Total 31.3 31.2 39.2 64.1 52.0

Contribution from Topside Maintenance 97.2% 76.2% 76.2% 83.1% 58.2%

* based on figures from Prospectus

Source: Company

Table 3: Order Book and Tender Book

Order Book

Description Est. contract balance (RM'm) Contract Ends

Petronas Carigali: Integrated Minor Maintenance (IMM) 80 Dec-11

November 2010 but work ends
430
Petronas Carigali: Hook-up and Commissioning June 2011
Murphy Sabah: Topside Major Maintenance 80 Dec-12

Brunei Shell Petroleum: Charter of Dayang Zamrud 62 Feb 2013 plus 2 years

Sarawak Shell & Sabah Shell: Topside Maintenance Contract 390 March 2015 plus 1 year

Total 1,042

Tender Book

Estimated Contract Value

Duration (years)
Description (RM’m)

Petronas Carigali Topside Structural Maintenance Contract 800 5

SKO (Sarawak Operations)

Petronas Carigali Topside Structural Maintenance Contract 400 5

SBO (Sabah Operations)

Petronas Carigali Topside Structural Maintenance Contract 500 5

PMO (Peninsular Operations)
Hook-up & Commissioning Umbrella Contract 2,000 2

Total 3,700

Source: Company

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♦ Internalisation of costs via marine charter segment. DMSSB’s earnings are largely internally-generated
and its vessels (3 workboats and 1 supply boat) are mainly chartered to sister subsidiary DESB. However, at the
start of FY10, the segment started generating external revenue with the 3-year charter of MV Dayang Zamrud to
Brunei Shell Petroleum for a contract value of around RM70m (refer to Table 2). Going forward, although the
company might expand its fleet (it is still chartering third-party workboats) we expect the acquisitions to
supplement its topside maintenance operations instead of being chartered out for additional revenue. Note the
company has recently entered into an acquisition for an offshore accommodation workboat from Shin Yang
Shipyard S/B at a purchase price of RM63.7m. We take this as a signal that the company is gearing up capacity
in anticipation of more contracts in the near future.

Table 4: Dayang Enterprise’s Marine Fleet

Name Type Built
Dayang Pertama Maintenance and Accommodation workboat 2005
Dayang Berlian Maintenance and Accommodation workboat 2007
Dayang Nilam Maintenance and Accommodation workboat 2008
Dayang Zamrud Maintenance and Accommodation workboat 2009
Dayang Maju Straight supply vessel 2006

Source: Company

♦ Diversification via Borcos. Syarikat Borcos Shipping S/B is Dayang’s 40% associate acquired in December
2009 at a price-tag of RM132m. To date, Borcos operates 35 vessels and is considered second to Bumi Armada
in terms of vessel fleet. In terms of newbuilds, the company is awaiting two 12k-brake-horse-power (bhp)
anchor handling tug and supply vessels (AHTS) which are tentatively scheduled for delivery by mid-2011. Initial
thoughts were to list Borcos in 2011, but due to certain operational headwinds on Borcos’s end the plan has
been pushed to later.

Table 5: Borcos Fleet

Name Vessel Type
1 MV Borcos 12 Mooring Launch
2 MV Borcos 13 Mooring Launch
3 MV Borcos 21 Standby/Safety
4 MV Borcos 23 Standby/Safety
5 MV Borcos 24 Standby/Safety
6 MV Borcos 118 Fast Crew Boat
7 MV Borcos Baru Tug Boat
8 MV Berkat Laju Utility
9 MV Borcos Tegas Utility
10 MV Borcos Taqwa Utility
11 MV Borcos Tariq 1 Utility
12 MV Borcos Basma 1 Flat top dumb barge
13 MV Borcos Fateh Utility
14 MV Borcos Fadel Utility
15 MV Borcos Sabhan 1 GP Vehicle
16 MV Borcos Sabhan 2 GP Vehicle
17 MV Borcos Sabhan 3 GP Vehicle
18 MV Borcos Sabhan 4 Standby Utility
19 MV Borcos Firdaus 1 Utility
20 MV Borcos Firdaus 2 Utility
21 MV Borcos Firdaus 3 Utility
22 MV Borcos Firdaus 4 Utility
23 MV Borcos Firdaus 5 Utility
24 MV Borcos Firdaus 6 Utility
25 MV Borcos Firdaus 7 Utility
26 MV Borcos Firdaus 8 Utility
27 MV Borcos Firdaus 9 Utility
28 MV Borcos Tasneem 1 AHTS
29 MV Borcos Tasneem 3 AHTS
30 MV Borcos Tasneem 4 AHTS
31 MV Borcos Tasneem 5 AHTS
32 MV Borcos Tasneem 6 AHTS Delivered in Jul-FY10
33 MV Borcos Tasneem 7 AHTS Delivered in Aug-FY10
34 MV Borcos Tasneem 8 AHTS Delivered Feb- FY10
35 MV Borcos Tasneem 9 AHTS Delivered March –FY10

Newbuilds Vessel Type Tentative Delivery Date

36 MV Borcos Thahirah 1 OSV Due mid-2011
37 MV Borcos Thahirah 2 OSV Due mid-2011

Source: Borcos Website

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♦ Borcos buy, backed by net profit guarantee….. The buy was backed by a RM65m profit guarantee (around
RM26m associate earnings to Dayang) for FY10 and a share clawback agreement in the case of an equity
shareholding dilution with the conversion of Borcos’ preference shares. Should the company fail to hit the
agreed-upon target a compensation payout to the max of RM6m is triggered. This will be written-down from
Dayang’s investment-in-associate in the company’s balance sheet.

♦ …but associate is likely to disappoint. Management mentioned that Borcos could miss the RM65m target
set, as it encountered late delivery of new vessels (Borcos Tasneem 6, 7, 8 and 9) during the year, and has
guided a reduced net profit of RM20-40m for FY10 and FY11 respectively. However, they also mentioned that
there is a possibility that net profit could still meet the RM60m level should they be successful in recognising
some deferred tax write-backs earned from a previous tax provision for their vessels. To-date, management is
unable to confirm if the tax write-back will occur within the year.

Industry Outlook

♦ Oil and gas sector outlook neutral for now. In our August stockwatch, we mentioned that we were still
neutral on the sector, despite the heavy news flow in the market thus far. Our main concerns were: 1) the lack of
exploration-related jobs in the near term; 2) rising competition for contracts among asset owners and equipment
manufacturers after the aggressive capacity expansions in 2007-08; and 3) the spotlight on safety standards,
which could raise the specifications (and costs) for offshore installations and thus affect the risk-reward
assessment for new projects. Our reservations proved true during our 2QFY10 results reviews when three of the
companies under our coverage (Wah Seong, KNM and Petra Perdana) came below our expectations mainly due to
the first concern we listed above.

♦ Major oil and gas awards soon? Despite our present conservative stance, we admit there is a high likelihood of
major contract awards towards the end of FY10 especially for brownfield services as Petronas’ focus turns to
rejuvenating existing domestic fields via enhanced oil recovery (EOR) techniques and as about half of Malaysian
offshore production platforms are more than 20 years old and need major refurbishment. Besides the RM3.7bn
worth of contracts mentioned above (refer to Table 3), other major projects we have heard off thus far are: 1)
Exxonmobil’s EOR project for the Tapis field; 2) ammonia and urea plant in Kimanis, Sabah; 3) expansion of
Petronas’ Melaka refinery complex; and 4) proposed LNG regassification terminal in Melaka.

♦ Brighter outlook in the long term. We remain bullish on the longer-term outlook for the sector as global
demand recovers. Moreover, with the oil and gas sector being one of the twelve Malaysian National Key Economic
Areas (NKEA) it will get ample attention going forth. The Government has mentioned that it hopes to see an
incremental gross national income (GNI) of RM131.5bn from the oil, gas and energy sectors and looks to some
RM271bn of investment primarily sourced from the private sector (51.7%) over the next decade to enable the
sector to perform as such.

Figure 3: Historical Petronas Capex Expenditure

30.0
Do mestic
25.0 Internatio nal

20.0

15.0

10.0

5.0

-
FY2006 FY2007 FY2008 FY2009 FY2010
F YE

Source: Petronas

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Financial Analysis

♦ So far so good. Net earnings have grown steadily since FY05 and the company has chartered a four-year net
profit CAGR of around 18.9% on the back of increasing contract wins. Worth noting is that the company has
managed to sustain both its GP and net margins at around 40% and 20% respectively signalling that the
continual growth has not been at the expense of deterioration in operational management.

Figure 4: Historical Gross Profit and Net Profit Margins

%
90.0%

80.0%

70.0% Net M argins GP M argins

60.0%

50.0%

40.0%

30.0%

20.0%

10.0%

0.0%
2005A 2006A 2007A 2008A 2009A

FYE

Source: Company

♦ A relatively healthy balance sheet. Dayang has traditionally been relatively debt-free as it is a pretty
conservative company. For FY07-08 it had a net cash position, but it geared up in FY09 because of the Borcos
acquisition (net gearing ratio rose to 0.2x). As at 2QFY10, Dayang’s net gearing ratio improved to 0.1x. Internal
targets are to keep the company’s net gearing ratio below the 1.0x mark. However, we believe it is unlikely that
the debt levels will reach such heights unless the company undertakes a sizeable acquisition.

♦ Improved 2HFY10 guided for. Dayang recorded an acceptable RM35.6m operating profit for 1HFY10 (+2.2%
from FY09 operating profit of RM35.6m) as its topside maintenance operations continued to uphold earnings
momentum. However, contributions from its associate – Borcos were weak at only RM1.8m as the company
recognised losses in 2QFY10. This was attributable to reasons we had mentioned above i.e. the late delivery of
four 5k-bhp vessels. Management has guided for a better 2HFY10 as they foresee contributions from the topside
maintenance projects secured in 1HFY10 to trickle in. The four new vessels have also been chartered out (albeit
mainly on spot terms) as at 2HFY10. In regards to Borcos earnings, management guided a significant
improvement only in FY11. As at 2QFY10 net earnings achieved 42% of consensus net profit estimates of
RM65.2m.

Table 6: 2QFY10 Quarterly Results Announcement

Q2FY09 Q1FY10 Q2FY10 QoQ YoY 6MFY09 6MFY10 YoY

Revenue 63.2 43.0 56.5 31.2 (10.6) 108.3 99.5 (8.1)

Operating Profit 21.3 15.6 20.0 28.2 (5.8) 34.9 35.6 2.2
Finance costs (0.0) (1.5) (1.5) 2.3 nm (0.1) (2.9) nm
Share of Associates - 2.1 (0.3) (113.2) nm - 1.8 nm
Profit before taxation 21.2 16.2 18.3 12.5 (14.0) 34.8 34.5 (0.8)
Income tax expense (5.1) (3.2) (3.9) 20.2 (24.1) (7.5) (7.1) (6.4)
Profit for the period 16.2 13.0 14.4 10.6 (10.8) 27.2 27.4 0.7

Margins ppts ppts ppts

Operating Profit 33.6 36.3 35.4 (0.8) 1.8 32.2 35.8 3.6

Profit before taxation 33.6 37.7 32.3 (5.4) (1.3) 32.2 34.6 2.5

Profit for the period 25.6 30.3 25.5 (4.7) (0.1) 25.2 27.6 2.3

Source: Company 2QFY10 quarterly results announcement

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Investment case

♦ Competitors many, but few are peers. While there are many offshore maintenance and hook-up and
commissioning players in the Malaysian space, only four are considered notable competitors: Kencana Petroleum,
Shapadu Energy (subsidiary of Sapuracrest Petroleum), Sarku Engineering and Petra Energy. Previously there
was also Vastalux Energy but since its suspension of licence by Petronas Bhd in early FY10, it has been little
threat to Dayang. The small number of notable players bodes well for Dayang as it ensures a larger slice of the
pie for Dayang.

♦ Premium margins. Dayang has been consistently churning out net margins of above 20%, double that of its
industry peers like Petra Energy, Kencana Petroleum and Sapuracrest which typically commands net margins at
or below the 10% mark. Management mentioned that the better margins are due to: 1) management’s
experience in contract pricing and managing costs (via utilising their own workboats instead of relying on third-
party charters); 2) strong relationship with suppliers, thus favourable pricing for materials; and 3) “good-pay-
master” reputation that promotes productivity of their staff.

Figure 5: Historical Revenue and Net Margins

250.0 80.0

70.0
200.0 Revenue
60.0
No rmalised Net Co re P ro fit
50.0
150.0
RM'm

%
40.0

100.0
30.0

20.0
50.0
10.0

0.0 0.0
2005A 2006A 2007A 2008A 2009A

FYE

Source: Company

♦ Potential for order book replenishment is high. As mentioned, given that the company has few notable peers
and it also has a long-standing track record in the maintenance and rejuvenation industry, we expect their
chances in securing part of the significant tender book (refer to Table 3) to be high. Assuming a conservative
30% success rate for the Petronas Carigali Topside Structural Maintenance Contract in Sarawak, Sabah and
Peninsular Malaysia, and a 20% success-rate for the Hook-up & Commissioning Umbrella Contract, Dayang could
be set to win around RM910m worth of contracts, 0.8x of their current order book.

♦ Earnings lift from Borcos venture. Although Borcos is now facing some operational headwinds, there is
potential for Dayang’s earnings to scale new heights. Even at our conservative forecasts of RM8-18m for FY10-12
from Borcos, it already makes up 15.3-22% of Dayang’s forward earnings. Based on our sensitivity analysis,
should the associate’s FY11 earnings meet management’s guided net profit of RM40m and assuming further net
profit of RM60m for FY12, Dayang’s FY11-12 net profit would be lifted by 2.3-6.2% to RM72.3m and RM85.5m,
from our current RM70.6m and RM80.5m. It would then contribute 22.1-28.1% of Dayang’s earnings.

♦ Sights on regional expansion. Moves to expand the company’s regional presence has also been effected, and
the company’s most recent tie-up (in FY09) was with Brunei Alpha One Engineering Services to garner contracts
from Brunei Shell and Total Elf. For now the company has already spearheaded their entrance to the Brunei
market via the charter of their workboat Dayang Zamrud.

Forecasts

♦ Forward earnings to be spurred by topside maintenance earnings. Given the current order book of around
RM1bn and a burn-rate of around RM200-300m p.a., Dayang’s revenues are guaranteed for at least the next 3
years. We forecast FY10-12 revenue for the topside maintenance division to be RM240-320m; this implies a

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 replenishment rate of around RM100m for FY12 which we view as easily achievable for Dayang. Although we have
forecast around RM45.5m marine charter division earnings p.a., we expect most of it to be internally generated.
External contributions will be from Dayang Zamrud which stands at RM15.5m p.a..

♦ Higher margins from topside maintenance division as well. In terms of margins, we forecast EBIT margins
of 26% for the topside-maintenance division and 23% for marine charter division. Our assumptions will yield
FY10-12 EBIT earnings of RM63.6m, RM79.4m and RM89.8m respectively.

able 3: Borcos Earnings Assumptions

Table 7: Dayang Group Earnings Assumptions

Revenue FY08A FY09A FY10F FY11F FY12F

Topside Maintenance 180.2 196.3 240.0 280.0 320.0

Marine Charter 42.3 62.7 45.5 45.5 45.5

Equipment Hire 5.0 4.2 3.0 3.0 3.0

Elimination (46.4) (66.2) (30.0) (30.0) (30.0)

Total 181.1 197.0 258.5 298.5 338.5

Margins

Topside Maintenance 29.6% 15.4% 26.0% 26.0% 26.0%

Marine Charter 16.9% 30.3% 23.0% 23.0% 23.0%

Source: RHBRI estimates

♦ Borcos: increasing contribution year-on-year. We opt to be conservative at this juncture in regards to

Borcos earnings although there is a likelihood of the company recognising some deferred tax benefits from their
transfer of their vessels. We forecast FY10-12 net earnings to be RM20-45m respectively which will result in
RM8-18m associate contributions for Dayang. Our estimates are below management guidance of RM20-40m net
profit for FY10 and FY11 respectively.
QFY10 Quarterly Results Announcement
Y10 rly Resultsouncet

Table 8: Borcos Earnings Assumptions

RM'm FY10F FY11F FY12F

Net profit 20 35 45
40% contribution 8 14 18

Source: RHBRI estimates

Risks

♦ Highly dependent on domestic contracts and Petronas. Most of Dayang’s earnings are domestically driven,
and it is obvious from the order and tender book (refer to Table 3) that the company is very much reliant on
Petronas contracts. Although this bodes well in the near term, with Petronas’ looking to revitalise the domestic oil
and gas sector, in the long run it also means that the company has little control over its project flows.

♦ Weakness in Borcos earnings going forward. Recall we mentioned that Borcos is likely to miss its RM65m
profit target for FY10 due to late deliveries of four vessels within the year. Although accounting-wise this could be
offset by deferred tax benefits recognised, while we note that its new vessels ( four 5k-bhp AHTS vessels) have
been chartered out on short-term contracts since 2QFY10, any delays in other incoming vessels (two 12k bhp
AHTS vessels) could result in uninspiring earnings accretion to Dayang.

♦ Continued sluggish contract flows. 2009 and 1H2010 has been a tough period for Malaysian oil and gas
service providers as contract flows were extremely sluggish. While flows seem to have picked up in recent times
(the award of the long-awaited Sabah Oil and Gas Terminal (SOGT)) and we are hoping that FY11 will be a better
year, any further delays could have adverse impacts to the domestic players, inclusive of Dayang.

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Valuation

♦ Initiate coverage with an Outperform call. We value Dayang Enterprise at RM2.61/share based on FY11 PER
of 13x (in-line with the target PER for Kencana Petroleum and Sapuracrest Petroleum). Our fair value estimate
implies a 26% upside to the stock’s current share price of RM2.07. We like Dayang for its premium net margins
and we believe the company is currently in an industry sweet spot as a reputable brownfield services oil and gas
player. Notwithstanding is the upside potential to net earnings should its associate, Borcos, outperform our
conservative assumptions. Petronas’ focus in developing and rejuvenating the existing domestic fields is sure to
lead to more contract flows for Dayang Enterprises.

Table 9. Earnings Forecasts Table 10. Forecast Assumptions

FYE Dec (RMm) FYE Dec FY10 FY11 FY12

FY09 FY10F FY11F FY12F

Turnover 197.0 258.5 298.5 338.5 Revenue

Turnover growth (%) 8.7 31.2 15.5 13.4 Topside Maintenance 240.0 280.0 320.0

Marine Charter 45.5 45.5 45.5

EBIT 52.7 67.5 79.4 89.8 Equipment Hire 3.0 3.0 3.0

EBIT margin (%) 26.7 26.1 26.6 26.5 Elimination (30.0) (30.0) (30.0)

Total 258.5 298.5 338.5

Net Interest (0.3) (5.8) (8.3) (10.8)

Associates - 8.0 14.0 18.0 Margins

EI - - - - Topside Maintenance 26.0% 26.0% 26.0%

Marine Charter 23.0% 23.0% 23.0%

Pretax Profit 52.4 69.7 85.1 97.0

Pretax margin (%) 26.6 27.0 28.5 28.7 Borcos

Tax (7.6) (12.1) (14.5) (16.5) Net Profit 20 35 45

PAT 44.7 57.6 70.6 80.5 40% Contribution to Dayang 8 14 18

Minorities - - - -

Net Profit 44.7 57.6 70.6 80.5

Net Profit margin (%) 22.7 22.3 23.7 23.8

Source: Company data, RHBRI estimates

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 Table 11. Balance Sheet And Cashflow Forecasts

Balance Sheet (RMm) FY09 FY10F FY11F FY12F

Non-current assets 326.49 346.96 456.45 531.16

Current assets 138.10 169.00 164.26 201.20

Total assets 464.59 515.96 620.71 732.36

Share capital & Share premium 176.00 176.00 176.00 176.00

Reserves 147.74 187.76 237.20 293.55

Minority interest 1.00 - - -

Dividend 1.00 - - -

Shareholders fund 325.74 363.76 413.20 469.55

Long term liabilities 102.05 102.05 152.05 202.05

Current liabilities 36.80 50.15 55.46 60.77

Cash Flow (RMm) 2009 2010 2011 2012

Operating cash flow 50.2 55.5 80.8 95.4

Investing cash flow (164.0) (35.0) (130.0) (100.0)

Financing cash flow 73.8 (13.7) 28.8 25.9

Source: Company, RHBRI estimates

Chart 1: Dayang Technical View Point

♦ The share price of Dayang has been trading along
the Uptrend Line (UTL) since last Apr.

♦ Its upward momentum accelerated in late Dec

2009, when it shot up steeply to above the RM2.00
tough resistance level.

♦ But, it wasn’t until in Jun 2010 that the stock

managed to stabilise and traded at above this
tough resistance level.

♦ However, for the past few months, the stock has

been congesting at between RM2.00 and RM2.20
region.

♦ As it stays firmly at above the UTL of RM1.95 and

the RM2.00 level, its uptrend remains strong, in our
view.

♦ With yesterday’s closing at RM2.07, and a small

positive candle as well as the slight improvement
on the momentum indicators, the stock could surge
further to the RM2.20 all-time high level soon.

♦ If the 10-day SMA cuts above the 40-day SMA on

strong follow-through buying momentum, it will
trigger more upside into the uncharted territory of
above RM2.20.

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IMPORTANT DISCLOSURES

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