Dayang - is there a buying opportunity? (Part 2 of 2)
To a value investor, a value trap or a buying opportunity are opposite sides of the value investing coin being tossed up. Which side the coin lands is actually a question of valuation.
Dayang Enterprise Holdings Berhad (DEHB) is currently trading at RM 1.24 per share (as of 1 Dec 2020) compared to its book value of RM 1.42 per share (as of 30 Sep 2020).
You may think that it has enough margin of safety from the book value and hence this would be a buying opportunity.
But this is true only if there is no potential impairment. After all, the DEHC Group recognized some impairment in 2017 due to low vessel utilization.
Given the current Covid-19 situation and the global oil & gas excess capacity, will there be impairment in the immediate future?
But you cannot conclude that this is a buying opportunity or value trap until you have assessed the impact on the intrinsic value from the cash flow perspective.
As shown in Part 1, DEHB Group is actually a topside maintenance company venturing into the marine charter business.
The topside maintenance business is still intact. If this continues to overshadow the marine charter business, it will not be a value trap.
Join me in a 2-part series as I show the circumstances for DEHB not to be a value trap.
Part 2 is presented here while Part 1 was published in early Dec 2020. An update was published on 6 Feb 2022.
Is there an investment opportunity? Well, read my Disclaimer.
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Contents
- Did Top Management Seize Opportunities?
- Is there an Awesome Buying Opportunity?
- Will there be Spectacular Growth in Shareholders’ Value?
- How to Secure Your Investment by Minimizing Risk
- How to Benefit from the Case Study
Case Notes DEHB was listed in 2008 following the acquisition of 3 companies. Its 2008 Annual Report covered 15 months of operations. Still, the Group 2008 income statement only consolidated the revenue and results for the 10 months. This is from 1 March 2008 to 31 December 2008 using the acquisition method of accounting. As such, I have ignored the performance of 2008 when it comes to looking at historical financial performance. DEHB is currently structured as shown below: As there are two listed entities under DEHB I will use the following definitions in the post
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Did Top Management Seize Opportunities?
- 5 are Executive Directors that have an average of 10 years of Board tenure
- 5 are Independent Non-Executive Directors that have an average of 5 years Board tenure
- There is one Non-Independent Non-Executive Director. He has been with the Board for 7 years with an Alternative Director who was appointed in Jan 2020.
- The Executive Chairman of DEHB serves as Non-Independent Non-Executive Director of PPB
- The Executive Deputy Chairman of DEHB serves as Executive Chairman of PPB
- The Alternate Director of DEHB also serves as Alternate Director in PPB
Operating performance
- Those in the drilling business
- Those in the floating production and operations (FPO) sector
- Carimin Petroleum
- Deleum
- Petra Energy
- T7 Global
Chart 1: Peer Revenue Index Note: The comparative revenue was from 2011 onward as I could not find earlier data for Carimin as it was listed in 2015 |
Chart 2: Peer Returns |
- Revenue-wise, DEHB Group is way ahead of the peers. Note that we are comparing revenue indices with the 2011 revenue as the base. In terms of RM revenue, DEHB Group had the largest revenue from 2013 onwards.
- ROE-wise, DEHB Group ranked No 2 for most of the past 9 years. The best performance was by Deleum but I suspect that this was because it did not have any marine charter business.
Capital allocation
- Paid out RM 284 million as dividends. This was equal to an average 27 % payout ratio.
- Spent RM 565 million (net of proceeds from disposal) for Property, Plant and Equipment
- Spent RM 1,056 million as total purchase consideration for PPB. This is the net of cash acquired and realization of post-acquisition reserve of PPB as an associate.
Expansion into the marine charter segment
- In 2009, it has spent RM 135 million to acquire a stake in Syarikat Borcos Shipping Sdn Bhd (Borcos) although the Board did not state why it decided to dispose of Borcos after a year.
- In 2011, it subscribed to a private placement of PPB. DEHB then went on to acquire more shares in the open market so that it held 11.53% in PPB by the end of 2011.
- By 2015, DEHB had spent RM 1,056 million for 98% of PPB which had shareholders’ funds of RM 744 million as of the end of 2015.
Has top management has seized opportunities?
- Operational-wise, I would rate management performance as among the better ones in the oil & gas service sector. They have contributed to the right-sizing and other operational improvements in PPB Group
- Excluding the diversification into the marine charter business, the capital allocation looks OK.
- The venture into the marine charter business has not shown any results. While I am confident that management would be able to turn it around, it does raise questions about the next strategic plans.
Is there an Awesome Buying Opportunity?
Case Notes Although DEHB comprises 2 listed companies, I have not attempted to value DEHB Group by the "sum-of-parts" valuation of PPB Group and the non-PPB Group part of DEHB Group. Recall that I undertook such an exercise in the UOA case study. For DEHB, the operations between the PPB Group and the non-PPB Group part was not only more integrated than those of UOA, but also the information for separate valuation was not readily available. There were too many assumptions that I have to make for this "sum-of-parts" valuation that the results may not be reliable. The key point about valuation is that just because you can mathematically get a number, it does not necessarily mean that it shows the correct picture. You still have to exercise some judgment about the appropriate method to use. This comes from experience. If you are just starting out to analyze and value companies, it may be helpful to supplement it with third-party analyses. There are several financial advisers who provide such analyses. Those who do this well include people like Seeking Alpha.* Click the link for some free stock advice. If you subscribe to their services, you can tap into their business analysis, valuation, and risk assessment. |
- Asset-based where the assets are viewed as stores of value. I would assume that the Balance Sheet reflects the fair value of DEHB Group’s assets and liabilities given the impairment history.
- Earning-based where the assets are viewed as generators of value. This is generally assessed based on the Free Cash Flow generated by the business over its lifetime.
- In such instances, the base case Earning Value would not be realistic.
- In a turnaround, you would assume that the future should be better than the historical performance.
Scenario 1
- A time-weighted actual average performance of the past 11 years except for 2017
- The 2017 performance is to be equivalent to the average of the 2016 and 2018 performance. The PAT for 2017 would then be RM 99 million instead of a loss of RM 153 million. This is still conservative compared to the 2018 and 2019 PAT of RM 144 and RM 222 million.
Scenario 2
- The Earning Power Value is less than the Asset Value. This is not surprising as DEHB Group has not been operating on all cylinders.
- Over the past 5 years, there have been periods when the market price has been greater than both the Earning Power Value and Asser Value.
- The Asset Value provides some margin of safety at the current market price.
- At the current market price, there is only a margin of safety from the EPV under scenario 2.
Chart 3: Dayang valuation |
Table 1: Dayang valuation metrics |
- If you believe that the future would be better than that projected, then the EPV would be higher than those presented.
- If you believe that the future would be worse than the scenarios presented, then the EPV would be lower than the base case. In this event, you should not even be contemplating any investment in DEHB.
Will there be Spectacular Growth in Shareholders’ Value?
Chart 4: Dayang Q Rating |
- A high-quality company will have a good likelihood of increasing shareholders’ value.
- A low-quality company is one that is likely to destroy shareholders’ value.
- The Q Rating assess this dimension
How to Secure Your Investment by Minimizing Risk
- Privatization risk
- Business risk
- It undertook a private placement and a rights issue of shares in 2019. The rights issue was offered at RM 0.92 per share which is lower than the current market price of RM 1.24 per share
- Apart from the Executive Directors, the other major shareholder is Naim Holdings Bhd (Naim) which holds about 26 % of DEHB. Naim is in the property and construction sector that has been facing a soft market for the past few years. I doubt Naim would want to spend its money on a privatization exercise.
- Given DEHB February 2020 price of RM 3.00, there would not be many minority shareholders who would be happy for DEHB to be privatized at the current market price
- Immediate to mid-term risk: a prolonged excess global oil & gas capacity scenario. Does DEHB Group have the financial resources to withstand this scenario?
- Long-term risk: depletion of Malaysian oil & gas reserves. Historically DEHB Group revenue came from Malaysia. The question then is whether DEHB Group is able to expand to other countries.
Financial resources
- At the end of 2019, DEHB Group order book stood at RM 4.5 billion equivalent to about 5 years of the past 3 years' average annual revenue.
- Over the past 7 years where information was provided, the lowest order book was in 2016 with RM 2.8 billion. DEHB Group is lucky to be in the brownfield services sector as this has been less impacted than the greenfield sector.
Going beyond Malaysia
- It can compete internationally in securing new contracts
- It is able to execute them profitably.
How to Benefit from the Case Study
- After its 2019 corporate exercise, DEHB Group is financially strong with RM 317 million cash as of the end of June 2020 and a debt-equity ratio of 0.46. It would be able to weather a longer downturn if this happens.
- Except for 2017, it has a strong track record of being profitable since its listing in 2008. The 2017 performance was a one-off blip resulting from its acquisition of PPB.
- PPB has since been restructured, right-sized and the integration with DEHB has improved its vessel utilization.
- The Asset value has some margin of safety at the current market price. Buying DEHB at the bottom part of the cycle also provides some margin of safety
- Scenario 2 is likely to happen and will provide a 30% margin of safety at the current price.
- Prosper when the global economy recovers and/or the oil price increases,
- But will have some downside protection when recovery of the oil & gas industry is prolonged
- The oil price has to be at the 2011 to 2014 levels ie north of USD 100 per barrel for Brent crude oil. Global demand has to grow substantially for this to happen.
- DEHB Group must be able to achieve and sustain the 2019 performance for a couple of years. Being a brownfield service provider, DEHB Group might be able to pull it off if the global economy recovers quickly after the Covid-19 vaccine is widely distributed.
- The stock market may have to be irrationally again as it did in the early part of this year when the price of DEHB went as high as RM 3.00 per share.
End of Part 2 of 2
An Update was published on 6 Feb 2022
Reading guideIf you are a first-time visitor to this blog, you may not be familiar with some of the concepts that I have used in my analysis and valuation. I suggest that you check up the Foundations series - Fundamentals 01, Fundamentals 02, and Fundamentals 03. I also have a Definitions page in case you are not familiar with the terms I have used.
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