Is Dayang one of the better Bursa Malaysia Oil and Gas stocks?

Value Investing Case Study 07-3. I first covered Dayang in Dec 2020. That analysis was based on the Annual Reports till 2019. This post is an update incorporating the FYE 2020 results and the LTM results for 2021.

When I first wrote about Dayang Enterprise Holdings Berhad (Dayang or the Group) in Dec 2020, it was trading at RM 1.24 per share. The market price has since declined to RM 0.89 per share (as of 11 Jan 2021). During this period, the Book Value of Dayang has remained about the same at RM 1.43 per share.  

In Dec 2020, Brent crude oil was trading around USD 48 per barrel compared to the early Jan 2022 price of USD 79 per barrel. Why has Dayang's market price dropped given the higher crude oil prices? 

Based on the LTM performance, Dayang would be making a loss of RM 61 million for FYE 2021. Is the market interpreting this as a deterioration in the business fundamentals of the Group?

Join me to explore why Dayang is not one of the better Bursa Malaysia Oil and Gas stocks to invest in. 

Should you go and short it then? Well, read my Disclaimer.

Contents

• Investment Thesis

• Rationale

• Financially sound

• Management are good operators

• Dayang has to rebuild its order book

• Valuation

• Pulling it all together

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Dayang has two main business segments:

• Topside Maintenance Services where it is one of the big boys in the offshore hook-up and commissioning business.

• Marine Offshore Support Services with the charter of marine vessels to the oil & gas industry. This is via its own marine vessels as well as through its 64% ownership of Bursa listed Perdana Petroleum Berhad (PPB).  

In my 2020 article, I had concluded that an investment in Dayang was a bet on the recovery of the global oil industry from the 2020 levels.  My view then was that if the oil & gas industry over the next 5 years performs as it did for 2019, it would be positive for DEHB.

Dayang's 2020 performance was affected by Covid-19.  Unfortunately, 2021 was another Covid-19 year. This post will revisit the earlier conclusion. Basically, I will attempt to answer the following 3 questions:

• Is it still financially strong to withstand a longer than expected Covid-19 pandemic?

• Has the business prospect deteriorated?

• Is there still a margin of safety?

If you are not familiar with the Group, I would suggest that you read the following previous articles.  This post assumed that you have the relevant background knowledge.

• Is Dayang a value trap? (Part 1 of 2)

• Dayang - is there a buying opportunity? (Part 2 of 2)

Investment Thesis

Dayang is very dependent on Petronas upstream CAPEX plans. This had been affected by the declining oil price in 2014/15. Dayang performance had also been affected by its expansion into the marine charter business. This segment had been experiencing excess capacity since 2015. 

Dayang had managed to overcome these 2 problems and was building back its profitability when Covid-19 hit. The past 2 years performance had been impacted by lower work orders and higher costs due to Covid-19. 

Dayang is financially sound with a good operating track record. This is notwithstanding the projected losses in 2021. While cyclical, the oil and gas industry still not yet in a sunset stage. There are signs that the industry has bottomed and is in the uptrend part of the cycle. Petronas is also projecting higher upstream CAPEX over the next few years. 

However there is not sufficient margin of safety at the current price. As such I would conclude that it is not one of the better Bursa Malaysia oil and gas stocks to invest in.  

Rationale

• The Group is financially sound. It has managed to reduce its Debt levels over the past few years and has a track record of generating positive Cash Flow from Operations.

• Management has a good operating track record. There was no significant change to the Board members or that of the senior management team. 

• Dayang has to rebuild back its order book in order to turn around. The prospects for doing so are positive given Petronas plans to increase CAPEX spending for the local upstream sector.

• A valuation of Dayang showed that there is a margin of safety based on the Asset Value. But there is no margin of safety based on the Earnings Power Value. As a conservative value investor, I would not invest in Dayang at the current market price. 

Financially sound

As of 30 Sept 2021, the Group had a Total Capital Employed (TCE) of RM 2.5 billion. 65 % of this as from SHF.

Chart 1: Sources and Uses of Funds

I would consider the Group as financially sound.

• The amount of Debt had been reducing over the years as can be seen from the chart below. In Sep 2020, Debt accounted for 30% of the TCE. This was reduced to 24 % by Sept 2021.

• Since its IPO in 2008, the Group had always managed to generate positive Cash Flow from Operations. This was despite incurring losses in 2017 and 2021.

• It had RM 424 million cash as of 30 Sept 2021 compared to its Debt of RM 597 million. 

Chart 2: Debt Equity Profile

In my 2020 article, I stated that one of the challenges was the financial position of PPB.  This seem to have been resolved given the following statistics of PPB.

Table 1:  Financial status     Source: TIKR.com

Management are good operators

While there were some changes to the Board and senior management team, many of the founding members of the Group are still running the Group. I see this as positive as the issues faced by the Group are more external than internal. The experienced team who built the Group would be in a better position to address this.

2020 and 2021 had been very challenging for the Group as can be seen from the Performance Index chart. Revenue had declined from 2019 and the profits had declined correspondingly.

Management had attributed the decline in revenue to the reduced work orders due to the Covid-19 measures. At the same time, the Group had incurred additional costs to comply with the Covid-19 SOP.

Chart 3: Performance Index

A segment analysis showed that the Topside Maintenance Services segment had always been profitable. However, the Marine Offshore Support Services segment profits depended on its vessel utilization. For example, the Group suffered a loss in 2017 due to low vessel utilization. Average vessel utilization was 

• 52% in 2017 - segment losses.

• 70 % in 2019 - segment was profitable.

• 53 % in 2020 - segment broke even.

• For the 9 months ended Sept 2021, vessel utilization was 46 % - segment losses.

Chart 4: Revenue Profile

Chart 5: Segment EBIT Profile

The impact of Covid-19 was felt across the industry as can be seen from the peer performance.

• The revenues for the peers in 2020 and 2021 were lower than those of the respective 2019 revenues.

• All the peers ROE declined in 2020. But they seemed to have held onto the 2020 position in 2021. In contrast, Dayang 2021 ROE was worse than that for 2020.

Chart 6: Peer Revenue

Chart 7: Peer ROE

The analysis suggests that Dayang problems are industry-related. The challenge is to have the financial resources to weather the soft period. 

Dayang has to rebuild its order book

In my post in 2020 I had concluded the following:

• The Group is one of the big boys in the hook-up and commissioning segment.  Its 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 conclusion is still valid today.

As a Malaysian oilfield services company, the performance of Dayang is very much linked to Petronas CAPEX plans. This in turn is affected by the crude oil prices. As the chart below shows, Dayang order book had been declining since 2019.

Chart 8: Revenue vs Order Book

However, with crude oil price currently trending upwards, I am hoping that the build-up of the order book will follow the 2017 to 2019 pattern. In other words, there would be an increase in the orders secured.

The good news is that Petronas is allocating an annual average capex of RM 20 billion for upstream activities. This is for the period between 2022 and 2027, of which 40% is for the international division. (Source: Business Today quoting RHB review of the latest Petronas Activity Outlook 2022-2024). 

This translates into a higher CAPEX for the local operations compared to those for the past few years. This should provide some near-term opportunity for Dayang to rebuild its order book.

Chart 9: Petronas CAPEX

Case Notes According to Laurentian Research on Seeking Alpha,  “…we are experiencing a commodity supercycle, driven by new demand from the energy transition, supply chain rebuilding, and populist uprising…The commodity supercycle may last a decade or longer, as the revenge of the old economy goes on. Intelligent investors surely do not want to miss this generational opportunity.” Laurentian Research focuses on the natural resource space. Its investment ideas have to pass an AMMoS smell test, which stands for the Assets, the Management, and Margin of Safety. For a commodity producer, the underlying assets are required to have: Low finding and development costs, and operating costs, relative to the realized product price - because the low cost means low risk and resilience in the commodity business. A readily expandable production capacity so as to capture the maximum benefit in commodity upcycles. As for management, Laurentian Research “…like to see a verifiable track record of successfully shepherding projects to fruition on schedule and under budget…have substantial skin in the game…” When it comes to margin of safety, Laurentian Research has this to say: “…I practice Greenwald's three-tiered valuation system, i.e., the asset value, earnings power value, and growth value. Asset value can be estimated with better accuracy and precision than earnings power value and growth value.” If you believe in the coming supercycle, Dayang would stand to benefit. You should then use the AMMoS smell test to see whether it is an investment opportunity for you. As you can see there are different ways to analyze and value companies. If you are a newbie that is still finding your approach, looking at what others have done can help you narrow down your choices. Sites such as Seeking Alpha.* can help. Click the link for some free stock advice. If you subscribe to their services, you can tap into their business analysis and valuation.

Case Notes

According to Laurentian Research on Seeking Alpha, 

“…we are experiencing a commodity supercycle, driven by new demand from the energy transition, supply chain rebuilding, and populist uprising…The commodity supercycle may last a decade or longer, as the revenge of the old economy goes on. Intelligent investors surely do not want to miss this generational opportunity.”

Laurentian Research focuses on the natural resource space. Its investment ideas have to pass an AMMoS smell test, which stands for the Assets, the Management, and Margin of Safety.

For a commodity producer, the underlying assets are required to have:

• Low finding and development costs, and operating costs, relative to the realized product price - because the low cost means low risk and resilience in the commodity business.

• A readily expandable production capacity so as to capture the maximum benefit in commodity upcycles.

As for management, Laurentian Research “…like to see a verifiable track record of successfully shepherding projects to fruition on schedule and under budget…have substantial skin in the game…”

When it comes to margin of safety, Laurentian Research has this to say:

“…I practice Greenwald's three-tiered valuation system, i.e., the asset value, earnings power value, and growth value. Asset value can be estimated with better accuracy and precision than earnings power value and growth value.”

If you believe in the coming supercycle, Dayang would stand to benefit. You should then use the AMMoS smell test to see whether it is an investment opportunity for you.

As you can see there are different ways to analyze and value companies. If you are a newbie that is still finding your approach, looking at what others have done can help you narrow down your choices. Sites such as Seeking Alpha.* can help. Click the link for some free stock advice. If you subscribe to their services, you can tap into their business analysis and valuation.

Valuation

There are 2 challenges in valuing Dayang.

• It is in a cyclical commoditized sector. As such we have to identify the relevant cyclical values. 

• The nature of its current business is very different from that before its acquisition of PPB. 

To take into account the above, I have assumed the following

• The GP margins and SGA margins are the average values over the cycle. I have assumed the average values from 2015 to 2021 as representative of these values.

• The current TCE and Debt levels are adequate for even its future peak performance.

• The long-term average revenue = 2019 revenue. I am assuming that crude oil prices would be around USD 60 to USD 70 per barrel of Brent crude. And that Petronas long-term CAPEX and Dayang contract wins would be at the 2019 level.

• Reinvestment rates. I have assumed the time weighted average rate from 2009 to 2020 rather than the one determined from the fundamental equation of Return X Reinvestment rate = Growth.  This is because Dayang is undergoing a turnaround and the past few years data will not be reflective of the future. I have assumed that the CAPEX spent on the acquisition of PPB is part of the reinvestment. 

I used the following financial model to perform the valuation. 

EBIT = GP - SGA

Where:

GP = Revenue X GP margin 

SGA = Revenue X SGA margin

I used a single-stage Free Cash Flow to the Firm model to value the group. I then derived the equity value by deducting the Debt and MI. I finally added back cash and Non-Operating Assets.

You will note that the equity value depends on the efficiency of the operations (as measured by the GP and SGA margins) and the capital structure.

The other assumptions employed are summarized in the following table.

Table 2: Valuation Assumptions

Notes

(a) Market cost of debt factor = 1.01. It represents the factor to convert the Book Value of Debt to the market value of Debt. This is assumed to be the same as that used to derive the WACC.

Based on these assumptions, the values of Dayang are:

Table 3: Valuation Summary

Note the following:

• The margin of safety comes from the Book Value.

• The NTA is at about the EPV levels. This suggests that Dayang could have overpaid for the goodwill in the acquisition of PPB.

• If I assumed a 5 % growth rate, the EV with growth increases to RM 1.43 per share.

• If the long-term average revenue is assumed to be 20% higher than that for 2019, the EVP = RM 1.12 per share and the EV with growth = RM 1.20 per share

Whether Dayang is an investment opportunity would then depend on your view of the long-term business. If you believe that the long-term growth rate is 5 % or that its long-term average revenue would be better than that of 2019, you will see a sufficient margin of safety.

But if you are conservative like me, you would conclude that there is no margin of safety based on the EPV. 

Chart 10: Valuation

Pulling it all together

The analysis showed that Dayang is still fundamentally strong.

• It had managed to bring down its Debts and it had a good track record of generating positive Cash Flow from Operations.

• We have essentially the same Board and management team. Management has a good operating track record. 

• The oil and gas sector is not yet a sunset one and there are signs that we are in the uptrend of the current cycle. There are also near term opportunities for increased work given Petronas CAPEX plans.

The question then is whether at the current price, Dayang is a good investment. In other words, is there is sufficient margin of safety?

Given that there have been several rounds of impairments and that we have reached the bottom of the industry cycle, the NTA would provide the floor price. But any margin of safety based on the Earnings Value would depend on your outlook for the sector.

The Topside Maintenance Services segment seemed to be profitable throughout the cycle. The challenge is ensuring that the Marine Offshore Support Services segment can achieve a high vessel utilization. It is not a capacity issue but rather a market demand issue. This will depend on Petronas CAPEX plans which in turn depends on the crude oil price. 

If you view Dayang through the Laurentian Research lens, it will pass the asset and management smell test. But I am not sure it will pass the margin of safety test as this would require a discount to the EPV.

Note that in my 2020 articles, I had concluded that an investment in Dayang was a bet on the recovery of the global oil industry from the 2020 levels.  My view then was that if the oil & gas industry over the next 5 years performs as it did for 2019, it would be positive for DEHB. 

While still true today, the current analysis suggest that there is no margin of safety if you view Dayang through a cyclical lens.  Any investment in Dayang today is because:

• You are looking at it from a momentum investment perspective.

• You are ignoring that it is in a cyclical sector. Alternatively you believe that it has growth opportunities within the cyclical sector.

However, I am a conservative value investor and as such Dayang is not one of the better Bursa Malaysia Oil and Gas stocks to invest in.

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If the above article was useful, you can find more insights on how to make money in my e-book. The e-book is now available from Amazon, Kobo and Google Play.

PS: If you are in Malaysia or Singapore, the e-book can only be download from Kobo and Google Play. 

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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