Is Dayang a Value Trap? (Part 1 of 2)
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. An update was published on 6 Feb 2022.
Is there an investment opportunity? Well, read my Disclaimer.
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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 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. As there are two listed entities under DEHB I will use the following definitions in the post
There are significant inter-company operations between DEHB and PPB. This is not critical if you are analyzing and valuing DEHB 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
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.
Chart 1: Corporate structure |
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.
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.
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 |
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.
Chart 3: Debt ratio history |
Is the Current Performance Outstanding?
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.
Table 3: Past 3 years' performance Note: Gross Profitability = gross profit margin / total assets |
- 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.
Tracing the DEHB Group’s Rich and Unique History
- 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
Chart 6: Revenue c/w Brent crude oil price |
- 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
- 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.
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?
Chart 8: Order book and Revenue c/w Brent crude oil price |
- 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
- 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.
Table 4: Segment capital intensity |
- 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
Is there a Great Future?
- 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.
Malaysia oilfield services sector
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.
- 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.
- Alam Maritim
- Bumi Armada
- Icon Offshore
- Marine and General
- Perisai Petroleum
- Scomi Group
Global oil & gas outlook
- 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
Chart 10: Global oil demand Source: IEA |
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.
Pulling it all together
- 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
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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Disclaimer & DisclosureI 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.
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