Is Dayang a Value Trap? (Part 1 of 2)

Value Investing Case Study 07-1:  This 2-parter is on the fundamental analysis and valuation of Dayang Enterprise Holdings Bhd.  This post focus on company analysis. 

Is Dayang a value trap?


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). 

It was trading at RM 2.51 per share as of the end of 2019.  Looking at the current price, it is cheap.  Is this a bargain or a value trap?  

You should not look at “cheapness” from the price perspective.  Comparing the current price with historical highs could be looking at how market sentiments have changed.

You have to look at whether the business fundamentals and hence its intrinsic value have changed.

There have been changes to the fundamentals since the end of last year due to Covid-19 and the excess supply in the global oil & gas market.  

Yet, you cannot conclude that it is a bargain or value trap until you have assessed how these changes have affected the intrinsic value. 

Join me in a 2-part series as I show the circumstances for DEHB not to be a value trap. 

I present Part 1 here and Part 2 was published on 20 Dec 2020.

Is there an investment opportunity?  Well, read my Disclaimer. 

This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. Learn more.



Contents

  • Is there anything Special about the Group’s Expertise?
  • Is there Concern about how it Uses its Funds?
  • Is the Current Performance Outstanding?
  • Tracing the Group’s Rich and Unique History
  • Is there a Great Future?
  • Pulling it all together

Valuation Date

1 Dec 2020

Company Name

Dayang Enterprise Holdings Bhd

Stock Name in Bursa Malaysia

DAYANG

Company’s Bursa Co

5141

Bursa Malaysia Sector

Energy

Listing Date on Bursa Malaysia

April 2008

Financial Year End

December

Latest Quarterly Results

3rd Quarter 2020, 30 Sep 2020

Shareholders’ Equity

RM 1,504 million (30 Sep 2020)

Market Capitalization

RM 1,316 million (1 Dec 2020)

Corporate Website

https://www.desb.net/

Table 1



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 2018 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.

As there are two listed entities under DEHB I will use the following definitions in the post

  • DEHB refers to Dayang Enterprise Holdings Bhd as the listed company
  • PPB refers to Perdana Petroleum Bhd as the listed company
  • DEHB Group refers to all the companies within the DEHB Group including those under the PPB Group
  • PPB Group refers to all the companies within the PPB Group only.

There are significant inter-company operations between DEHB and PPB.  This is not critical if you are analyzing and valuingDEHB Group.

But if you are trying to see which of the following is a better investment, then being able to identify who is contributing to what is important
  • Invest in DEHB alone
  • Invest in PPB alone
  • Invest partly in DEHB and partly in PPB

I am not addressing this last question in this post. Rather I will cover it separately as it covers not just fundamental analysis but also risk considerations.

For this post, I will look from the perspective of investing in DEHB alone. 


Is there anything Special about the DEHB Group’s Expertise?

DEHB Group is an oilfield services company - it is a major provider of offshore platform services in Malaysia.  

The chart below shows the current corporate structure of the group.

Dayang corporate structure
Chart 1: Corporate structure

DEHB Group's initial business in the 80s was the trading of hardware materials and supply of manpower for the offshore oil & gas industry.

Today the DEHB Group is involved in 

  • The provision of offshore topside maintenance services
  • Minor fabrication operations
  • Offshore hook-up and commissioning 
  • Charter of marine vessels relating to the oil & gas industry.

DEHB Group services are provided through

  • Its in-house facilities and staff
    • 2 fabrication yards cum warehouses ie at Labuan, FT and Kemaman, Terengganu.
    • 9 own marine vessels 
  • Its 64% ownership of Bursa listed Perdana Petroleum Berhad (PPB).  PPB and its subsidiaries own another 17 vessels and provide marine support services for the oil & gas industry. 

DEHB Group customers included Petronas Carigali, Sarawak Shell Berhad, and ExxonMobil.

Is there Concern about how it Uses its Funds?

The DEHB Group has a total capital employed (TCE) of RM 2.61 billion as of the end of Sep 2020, with SHF and loan accounting for about 58 % and 30 % of it respectively.  

Towards the end of 2019, the SHF was boosted by RM 89 million from a 1:10 rights issue at an issue price of RM0.92 per share.

Note that under its Sukuk programme, there is a condition subsequent covenant that requires DEHB to raise up to RM 75 million via a private placement by 30 Jun 2020. This has not been complied with and has been extended by another 1 year. 

About 81 % of the TCE is deployed for its operations with the balance tied up in cash.

As you can see from Table 2 and Chart 2, it has deployed its funds effectively.

Items

Ref

RM million

Shareholders’ Equity

SHF

1,504

Minority Interests

MI

319

Total Debt and Lease     

Debt

790

TCE

 

2,613


Items

Ref

RM million

Net Operating Assets

Net OA

2,105

Net Financial Assets

Net FA

508

Non-Operating Assets

Non-OA

0

Total

 

2,613

Table 2: Sources and Uses of Funds at 30 Sept 2020


Dayang Sources and Uses of Funds
Chart 2: Sources and Uses of Funds

It should be pointed out that the current debt level has been reduced substantially compared to that a few years ago. 

  • In the early post-listing years, DEHB Group had low debt levels
  • The debt-equity level jumped up in 2015 due to borrowings taken to finance the acquisition of PPB and also the consolidation of PPB’s debts.
  • It reduced to the current level following some corporate exercises at both PPB and DEHB levels.


Dayang debt history
Chart 3: Debt ratio history


Is the Current Performance Outstanding?

The DEHB Group reported a YTD PAT of RM 39.7 million for the period ended 30 Sep 2020 compared to a PAT of RM 150.0 million for the same period last year.  

DEHB Group attributed most of the current poor performance to the lower revenue due to the impact of the Covid-19 pandemic and global oil glut. 

According to the DEHB quarterly announcement

“The reduced revenue is mainly attributable to lower vessel utilization of 56 %...resulted from delay work orders…. The Group recorded a lower profit …as a result of higher operating costs incurred to adhere to the standard operating procedures to combat Covid-19.”

Dayang Performance Index
Chart 4: Performance Index

The results are in contrast with the turnaround achieved over the past few years as shown in the Performance Index chart.
  • Revenue growing since 2009
  • Gross profitability returning to the 2009 level after a decline in 2015 to 2017
  • Profits recovering after the 2016 decline and 2017 losses. 

DEHB Group suffered a loss in 2017 after accounting for impairment, forex losses, and operating losses in PPP Group due to low vessel utilization. 

The 2017 performance has affected the returns. From 2009 to 2011 the average ROE was 16 %, but for the past 3 years, it averaged 8 %.

Dayang past 3 years performance
Table 3: Past 3 years' performance
Note: Gross Profitability = gross profit margin / total assets

You may think that with an 8 % average ROE for the past 3 years, the DEHB Group is not generating enough returns for the shareholders.

But this is because not all the cylinders were firing.

DEHB Group has two main business segments
  • Topside maintenance 
  • Marine charter of vessels from both PPB Group and other subsidiaries of DEHB (that are not part of PPB Group).  Some of the vessels are used to support the topside maintenance work.

But if you look at these 2 segments as separate businesses (ie ignoring the inter-segment transactions) we have the picture as shown below. 

You can see that the topside maintenance business has been the main profit driver. The marine charter segment with about doubled the TCE of the topside maintenance business only broke even.

Dayang segment performance
Chart 5: Segment performance
Notes
Others - Includes equipment rental, investment holdings, and consolidated adjustments

TCE - estimated based on segment report, DEHB’s 4Q 2019 Quarterly Announcement. This is because the segment report in the DEHB 2019 Annual Report presented only the segment assets.  At the same time, some of the marine charter assets seemed to be reported under the top side maintenance segment in the Annual Report.  I suspect that this is due to the in-house use of marine charter services. 

Average Revenue - 2017 to 2019 average external segment revenue

Average EBIT - estimated based on 2017 to 2019 average segment results adjusted for the interest and finance expenses

PPB Group financials were consolidated from 2016.

Tracing the DEHB Group’s Rich and Unique History

In looking at the history of the DEHB Group, you have to separate it into 2 parts - pre and post-PPB.

PPB first came into the picture in 2013 as an associate. It then became a subsidiary (ie its accounts were consolidated) in 2015. 

The chart below shows the DEHB Group’s external sales profile over the past 11 years. 
  • The majority of the DEHB Group’s revenue was from the topside maintenance segment
  • The marine charter business became significant in 2015 after DEHB became the major shareholder of PPB. DEHB then consolidated PPB financials into DEHB Group financials

Dayang revenue
Chart 6: Revenue c/w Brent crude oil price

The topside maintenance business has been profitable throughout the past 11 years. 
  • Segment revenue grew during the 2009 to 2013 period in line with the growth in crude oil prices.
  • The segment was able to sustain its performance over the past few years due to the huge orders DEHB Group secured in 2013. This was despite the declining crude oil price

Yet, the marine charter business suffered losses in 2015 and 2017 
  • Before 2013, all the marine charter segment EBIT excluded those from PPB Group.
  • For 2013 and 2014, PPB Group’s charter business was accounted for as associate profits and formed part of the “Others” in the chart below. 
  • The “Others” for 2010 included the profits from its 40% share of Syarikat Borcos Shipping Sdn Bhd (Borcos).  This is an associate company that owns a fleet of 33 offshore support vessels. Borcos was disposed of in April 2011.

Dayang EBIT
Chart 7: EBIT c/w Brent crude oil price

Note: Others cover associates and consolidated adjustments. The increase in 2015 is due to the fair value gain from the acquisition of PPB 


How did DEHB grow?

During the first few years after listing, DEHB Group's main business was topside maintenance. 

Although it had 4 vessels by 2009, DEHB Group only reported its first external marine charter revenue in 2010.  Thus in 2008 and 2009, the vessels supported the topside maintenance activities.

The growth of DEHB Group was driven by the massive contracts it secured in 2013.  Thus, its order book for that year was more than 3 times the average order book for 2009 to 2011. 

Being in the brownfield oil service sector provided some downside protection.  You can see it from the chart as the order book declined in line with the declining oil prices. 

DEHB managed to re-build its order book so that by 2019 it was back to the 2013 level. 

But note that the 2019 order book included those for PPB (ie incl marine charter segment) whereas, in 2013, it was for topside maintenance.

Dayang revenue c/w Order book
Chart 8: Order book and Revenue c/w Brent crude oil price

To fulfill these orders, DEHB Group 
  • Aggressively hired increasing its headcount from 1 867 employees at the beginning to 2013 to 3,996 as of 31 March 2014.
  • Doubled the size of its fabrication yards
  • Added new vessels
  • Had more strategic tie-up with PPB that eventually resulted in PPB becoming a subsidiary of DEHB. 


Marine charter and PPB

From the onset, it would appear that DEHB wanted to expand into the marine charter business as a way to expand the Group’s business.
  • It expanded its in-house fleet from 3 vessels in 2008 to 9 vessels in 2019
  • In 2009, DEHB acquired 40% of Borcos.  It owns 33 offshore support vessels, including fast crew boats and anchor handling tugs.
  • It was not clear why Borcos was disposed of in 2011. It could be because of the low market vessel utilization in 2010.  By 2011 DEHB Group had 7 vessels in its in-house fleet.
  • Also, in Nov 2011, DEHB had subscribed to a 10% private placement of shares by PPB and had built this up to 11.53 % through open market purchase by the end of 2011
  • Over the next couple of years, DEHB acquired more shares of PPB so that by May 2015, it had amassed more than a 33% stake.  This triggered a Mandatory General Offer for DEHB to purchase the rest of PPB’s shares from the open market. As of November 2015, DEHB owned a 98.01% controlling stake in PPB.
  • To comply with the public shareholding spread, DEHB re-distributed some of PPB to the shareholders of DEHB so that today DEHB owns 64.0 % of PPB. 

The marine charter business is more capital intensive than topside maintenance. You can see this in Table 4.

Table 4 shows the segment revenue to assets ratio for both segments based on the average 2011 and 2012 segment performance

Dayang segment revenue to assets
Table 4: Segment capital intensity

The other key features of the marine charter business are
  • There are two market segments - greenfield and brownfield segments
  • The revenue is dependent on both utilization and charter rates
  • For strategic planning purposes, long term charter is preferred over short term charter

Although both the topside maintenance and marine charter segments serve the offshore oil & gas fields, they are driven by different business economics. 

Is there a Great Future?

Is there a great future?
The oil & gas industry can be broken down into three segments:
  • Upstream, or exploration and production (E&P) companies.  These find reservoirs and drill oil and gas wells.
  • Midstream companies that are responsible for transportation from the wells to refineries 
  • Downstream companies. These are responsible for refining and the sale of the finished products.

The oilfield services companies support the E&P companies and depend on the capital and operating expenditure of the E&P companies.  This is in turn governed by the current and future price of oil and natural gas.


Malaysia oilfield services sector

In Malaysia, all the upstream activities are offshore.  Hence Malaysian oilfield services are geared towards offshore exploration and production.

The marine charter or offshore supply vessel (OSV) industry grew up to support the offshore oilfield services. 

Furthermore, Petronas played a strong role in developing the Malaysia oilfield services industry.

Under the Petroleum Development Act, Petronas has exclusive rights to all the oil & gas rights in the country.  Petronas has used its licensing and other regulatory powers to develop the local industry.

DEHB Group has benefited from this.  It is not surprising that its business has been focussed on Malaysia.  I would expect that in the immediate to mid-term, this focus will continue. 

To a very large extent, the immediate to mid-term future of DEHB depends on Petronas upstream programme.

According to Petronas Activity Outlook 2020 to 2022:

“Malaysia has more than 12 billion barrels of oil equivalent (bboe) of undeveloped resources awaiting to be monetised. This presents great opportunities for new entrants and existing players to invest in marginal fields or Discovered Resource Opportunities (DRO) and extending value of Late Life Assets (LLA) until abandonment”

Petronas oil & gas info
Chart 9: Malaysia oil & gas activity
Source: Petronas

According to Petronas, Malaysia produced an average daily production of over 1.7 million barrels of oil equivalent in 2018.

At this production rate, the 12 bboe of undeveloped resources will last for about 19 years. 

This simplistic analysis shows that even with a focus on Malaysia, there will still be business opportunities for the next 2 decades. This should provide DEHB Group with enough time to plan its business direction for when the oil dries up.

DEHB Group is one of the big boys in the hook-up and commissioning segment.  So DEHB topside maintenance segment will do well both in the immediate term to mid-term.

The challenge is the marine charter business as there is currently over capacity among Malaysian players in this segment. 
  • The Malaysian OSV Owners’ Association (MOSVA) reported that the industry has a capacity of 300 vessels in 2019.  For the past three years, only 170 vessels have been occupied from 300 previously.
  • In the first half of 2020, MOSVA prepared a proposal for Petronas to set up a special-purpose vehicle to take over the assets of ailing oil and gas (O&G) companies.

There is another view of the dire condition. Look at the number of Bursa-listed OSV companies that have undertaken corporate restructuring or even delisting. 

Apart from PPB, we also have (in alphabetical order) the following examples:
  • Alam Maritim
  • Bumi Armada
  • Icon Offshore
  • Marine and General
  • Perisai Petroleum
  • Scomi Group

Global oil & gas outlook

It is obvious that Petronas upstream expenditure will be driven by global crude oil prices.

These in turn will depend on the global supply and demand situation.

The following charts from the Oil 2020 report by the International Energy Agency (IEA) summarized one projection. 
  • While the demand for 2020 will drop due to Covid-19, it is expected to bounce back in 2021.  Even though there is a long-term declining trend (shown by the green dotted line), the 2025 demand is projected to be at the 2019 level
  • We can expect some over-supply for 2020 to 2025

Global oil demand
Chart 10: Global oil demand 
Source: IEA


Global oil supply vs demand
Chart 11: Global oil demand vs supply
Source: IEA

I would conclude that in the next 5 years, we can expect the supply and demand to be like the 2019 level.

Extrapolating from here, we ought to see the average price levels for the next 5 years to be like the 2019 levels.

Yet, crude oil prices at the 2019 level would be positive for DEHB.

Pulling it all together

A definitive answer for whether DEHB is a value trap would be dependent on determining the Groups’ intrinsic value.

However, even at this stage, the indications are:
  • The topside maintenance business is performing.  
  • The challenge is in the marine charter business that is facing overcapacity. But there is unlikely to be further asset impairment for DEHB Group.
  • An investment in DEHB is a bet on the recovery of the global oil industry from the 2020 levels.  If the oil & gas industry over the next 5 years performs as it did for 2019, it would be positive for DEHB

Given the disparity between the current market price and the book value, there is a strong chance at this stage to rule out DEHB as a value trap.

But if you want a more definitive analysis, follow me in Part 2

I hope the case study illustrates the importance of the company analysis. You have to look behind the numbers. But this comes from experience as well as being familiar with how a business operates. If you are just starting out to invest, one way to supplement your lack of experience and knowledge is to rely on third-party analyses.  There are many such service providers and the people who do this well include The Motley Fool. Click the link for some free stock advice. If you subscribe to their services, you can have access to well-researched business analysis, valuation, and risk assessment.

End of Part 1 of 2

Part 2 of 2 was published on 20 Dec 2020


Reading guide
If 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. 



Investment books that I have read.

Books


Comments




Till today, I still read value investing books to see whether I can get new insights to incorporate into my value investing process. 

 

 

 

When Warren Buffett and Greenblatt started out, they also invest in special situations in addition to conventional stock investments. 



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Disclaimer & Disclosure
I am not an investment adviser, security analyst, or stockbroker.  The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies.   Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. 

The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. 

I may have equity interests in some of the companies featured.

This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.






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