Small but Mighty Daya (RHB)

We initiate  coverage  on Daya  with a MYR0.48  FV,  pegged to 15x FY14F EPS, in line with other small  cap  oil & gas (O&G)  companies.  The O&G division will spearhead  its  growth going forward, given  its ambition to expand its expertise beyond the downstream segment.  We like Daya’s strong  earnings  growth,  attractive  12x  FY14F  P/E  and  potential ownership of vessels to capture higher recurring earnings.

• An undiscovered gem.  Despite a shift  in  focus to  the O&G segment  in 2007  from polymers and technical services, Daya  has yet to receive the attention it deserves from the investment community. We believe this is due to  the  lack of a solid  domestic  track record.  Locally,  Daya  has only been involved in  the  Tapis  enhanced  oil  recovery  (EOR) and Telok Gas Development projects.
• First  local  O&G  company  to  clinch  a  North  Sea  job.  A  major milestone for Daya was when its subsidiary, Daya Offshore Construction (DOC),  landed two  long-term  North Sea contracts from Technip  totalling up to MYR610m in August this year.
• Potential  vessel  ownership  will  add  significantly  to  bottomline. Management  indicates that  DAYA intends to  acquire stakes in the  Siem Daya  1  (SD1)  and  Siem  Daya  2  (SD2)  offshore  subsea  construction vessels  (OSCVs).  If  finalised,  we  are  positive  on  the  deal  despite  the group having to take on higher debt, as  –  assuming  a  51% stake in a USD120m  vessel  and  75%  debt  to  total  asset  –  we  estimate  DAYA’s share of net profit at MYR4.9m per annum per vessel.  
• O&G  to  drive  21%  EPS  CAGR  over  FY12-15F.  We  expect  Daya  to achieve  65%/27%/6.8%  earnings  growth  for  FY13F/14F/15F,  mainly driven by its North Sea charter contract and higher orderlook recognition from offshore services.
• BUY,  MYR0.48  FV.  Our FV is based on  a  15x FY14F P/E,  in  line  with other small cap O&G stocks. Daya is trading at a FY14F P/E of 12x, or a 25% discount to its comparable peer average. The key risks are: i) falling out with Siem Offshore (SIOFF NO, NR), ii) inability to maintain high fleet utilisation, iii) loss of key personnel, and iv) USD volatility.