CGS-CIMB believes that Dayang Enterprise Holdings Berhad (DEHB) is looking to a record year in 2024 and sees further upside potential for the stock despite its 84% share price gain since June 2023.
“We believe that the market has yet to adequately price in the group’s strong earnings prospects. It estimates that the market is currently pricing in a sustainable return on invested capital (ROIC) of 13.9% as it is 5% to 11% pts below our forecasts of 19.1% in FY24F and 24.4% in FY25F.
“Valuations look undemanding to us with the stock trading at an ex-cash 2024F price-earning ratio (P/E) of 7.5 times which is at a 35% discount to its 10-year mean of 11.5 times.
“This is because DEHB offers robust earnings growth, excellent track record in brownfield maintenance services, and a strong net cash balance sheet, whilst offering dividend yields of more than 4% in FY24F,” it said in its Company Note today (Feb 20).
Therefore, CGS-CIMB raised its net profit forecasts for FY23F by 15% on better than expected activity in 4Q23F despite the monsoon season coupled with the closing out of several work orders in the final quarter – which typically garner higher margins.
“We also raise FY24F and FY25F by a more significant 24% to 46% mainly to reflect incremental revenue from the 3-year Asset Integrity Findings (AIF) contract announced in January 2024, management estimates this call-out contract to be worth RM1.2 billion.
“Our revised FY24F to FY25F net profit forecasts are currently 28% to 49% above Bloomberg consensus estimates,” it said.
As a result of the revisions and rolling our valuation one-year forward, it raised its Gordon growth model (GGM)-based target price (TP) to RM4.00 from RM2.50 (ROIC of 21.9%; weighted average cost of capital (WACC) of 9.5%; long-term growth (LTG) of 3%).
“DEHB remains a top pick in the Malaysian O&G sector and broader market.”
The research house said while it anticipated good earnings outlook for 2023, it projected that 2024F to 2026F will look even better.
DEHB’s 67%-owned subsidiary, Perdana Petroleum Bhd’s (PPB) recent charter contract wins for its accommodation barges at higher rates of RM90,000 to 120,000 per day suggested to CGS-CIMB that charter rates for offshore supply vessel (OSV) are moving up, alongside the tightness in supply and buoyant demand.
In 2023, the rate was RM70,000 to 75,000 per day in 2023 while the rates was RM55,000 to 60,000 per day in 2021 and 2022.
“In addition, DEHB’s core operations – in the offshore maintenance, construction and modification (MCM) and hook-up and commissioning (HUC) space – are poised to see higher work orders over the next three years, going by Petronas’ planned activity.
“On average, the national oil company projects annual MCM and HUC work requirements in 2024 to 26 to be 13% and 50% higher than the 2023 levels.
“These positive developments within the oil services landscape in Malaysia look set to propel DEHB’s earnings to a new record in 2024F, in our view,” it added.
Potential re-rating catalysts are better-than-expected earnings delivery, higher dividend payouts while downside risks are delays in work orders and non-renewal of its existing contracts, the research house said.
