Dyna-Mac Holdings Ltd - CIMB Research 2018-03-21: Safe Small-cap Proxy For Coming FPSO Upswing

Dyna-Mac Holdings Ltd - CIMB Research 2018-03-21: Safe Small-cap Proxy For Coming FPSO Upswing DYNA-MAC HOLDINGS LTD. NO4.SI

Dyna-Mac Holdings Ltd - Safe Small-cap Proxy For Coming FPSO Upswing

  • Dyna-Mac Holdings (DMHL) fabricates/assembles topside modules for floating production solutions and specialised structures for subsea projects.
  • External consultants and industry players forecast that at least 7-11 floating solution contracts may be awarded p.a. in CY18-21F, as crude oil prices have recovered.
  • DMHL has 17+ years of delivering topside modules and has forged relationships with customers since 2000 giving it credence in the upcoming contracting cycle.
  • Contracts worth S$90m have already secured for CY18F and DMHL is now in a net cash per share position (23.2% of share price). We expect narrower losses in CY18F.
  • Initiate with ADD and S$0.18 Target Price, based on 1.8x CY18F P/BV.

Initiate with ADD and Target Price of S$0.18 

  • We initiate with an ADD rating and Target Price of S$0.18 based on 1.8x CY18F P/BV (DMHL’s CY12-17 mean), at a c.30% discount to our target P/BV of 2.5x for Keppel Corp’s operation and maintenance (O&M) business. 
  • Dyna-Mac Holdings (DMHL)’s share price has been trading within the S$0.11-0.18 range since Aug 2016. Given the better financial footing now, we believe DMHL’s risk-reward is skewed to the upside. 
  • Potential re-rating catalysts are higher contract wins and return of dividend payouts. A downside risk is lower contract wins.

Topside module subcontractor with direct links to owners 

  • The topside modules that DMHL fabricates are for floating production storage and offloading (FPSO) and floating production storage (FSO) vessels, while its specialised structures are for semi-submersibles and sub-sea products. 
  • DMHL is commonly identified as a fabricator which complements larger yards Keppel Corp (KEP) and Sembcorp Marine (SMM SP, Add, Target Price: S$$3.01) and its long, direct relationships (c.17 years) with FPSO owners have led to direct contract wins separate from conversion contracts awarded to KEP and SMM.


FPSO back in the upcycle 

  • In its 1QCY17 executive summary, Energy Maritime Associates (EMA) forecasted c.50 FPSO awards in between 2017-21F in its mid-case scenario, where oil prices trade in the US$50-70/bbl range. It expected eight FPSO awards in 2017 (seven were awarded), followed by 10-11 FPSO awards annually from 2018F to 2021F This follows very few FPSOs awarded in 2015-16 (3-4 FPSO awards p.a.).
  • We look to Floating Production Storage Offloading (FPSO) players’ outlook, given that they are the main clientele for Dyna-Mac Holdings (DMHL)’s largest revenue generator – its module business. SBM Offshore (SBMO) and Modec (6269 JP, Not Rated) have historically been DMHL’s key customers. SBM won two of the seven FPSO contracts awarded in 2017 (Liza and Johan Castberg projects); and this resulted in DMHL winning a topside module fabrication contract for the Liza project in Nov 2017.
  • In SBMO’s 4Q17 presentation, it forecasted a base case of seven FPSO awards and a bull case of nine FPSO awards, annually, in CY18-19F, close to EMA’s base-case and bear-case outlook.
  • Generally, we believe a pick-up in FPSO contracts bodes well for DMHL, as well as its clients.

Strong fabrication heritage 

  • Dyna-Mac Holdings (DMHL) undertook complete module fabrication business in 1999 for the first time as a turnkey sub-contractor to Keppel Corp (KEP SP, Add, Target Price: S$10.00) for the fabrication, installation and pre-commissioning of topside modules for the FPSO Espadarte, owned by SBMO. 
  • Since 1999, DMHL has delivered c.279 topside modules, 27 skids and 49 pipe-racks. DMHL benefits from solid, longstanding relationships, a formidable track record and a strong market position in the upcoming contracting cycle, in our view.

Strategic relationship with Keppel Corp 

  • Keppel Corp (KEP) is a substantial shareholder in Dyna-Mac Holdings (DMHL) with a 24.4% stake currently. This relationship was forged during DMHL’s listing in 2011 as the company viewed KEP as a strong cornerstone shareholder that could enable DMHL to:
    1. secure more projects in Singapore and overseas, and
    2. enable DMHL to tap into KEP’s wider network and affiliated yard facilities in different parts of the world.
  • Historically, we note that DMHL often wins topside contracts which are KEP’s conversion jobs, and we suspect, besides the collaboration, this is because its main facilities along Gul Road are situated close to Keppel Shipyard’s yard.
  • Although there is no guarantee that contracts won by KEP will also be won by DMHL, given the historical track record, we believe there could be a strong possibility of this happening. CGS-CIMB forecasts at least S$2.0bn-2.5bn worth of production contracts for KEP in the next two years.

In recovery mode, kickstarts CY18F with order book of S$90m 

  • Dyna-Mac Holdings (DMHL) had a limited order book of S$13m in FY16 as there were hardly any FPSO contracts awarded globally that year. However, in CY17 it won S$101m worth of contracts for the Liza project from SBMO and from two other customers; that took its end-2017 order backlog to S$90m. This will fuel CY18F revenue, in our view.
  • According to news articles, ExxonMobil (XOM US, Not Rated) has already submitted an application for an environmental permit to develop the second phase of the Liza project, which we expect to include a larger FPSO with a production capacity of 220,000 barrels of oil per day (vs. Phase 1 which had 120,000 barrels of oil per day). DMHL is the incumbent fabricator for Liza Phase1, hence we believe its chances of winning a portion of Phase 2 are high. Given that the FPSO may potentially be larger in size, we believe the contract could also be larger in value.
  • We understand that there are at least S$500m worth of projects currently up for bid worldwide, including the Liza Phase 2 contract.

On better financial footing; in net cash position at end-CY17 

  • Dyna-Mac Holdings (DMHL) embarked on rationalisation exercises in CY15-17 due to the downturn in the oil and gas segment. It assessed its trade receivables, goodwill and yard investments and undertook relevant impairments with the largest being in CY16 to the tune of S$28.8m.
  • It also undertook the early redemption of its S$50m bond in CY15 (before its due date in Aug 2016) to re-jig its capital structure. Management has guided that its restructuring activities are completed (as of end-CY17), and as such, it is just awaiting the return of contracts, which has started to trickle in CY17.
  • DMHL is one of the few oil and gas service providers that are currently in a net cash position. As at end-CY17 it stood at a net cash position of S$30.3m, which translates into net cash per share of 3.0 Scts (23.2% of current share price). We note that DMHL has earmarked some assets for sale (S$32m). The successful sale of these assets would lift its cash position further, in our view.

Dividends ahead? 

  • Dyna-Mac Holdings (DMHL) paid dividends annually after its listing in Mar 2011 but halted payments in CY15-16 when it started to report net losses. Management has not committed to any dividends from hereon but should the company return to net profits and if it maintains its net cash position, we would not be surprised if DMHL resumes dividend payments.
  • Historically, dividend payout was 62.0-82.4% of net profit.


Narrower net losses in CY18F 

  • We project CY18/19/20F revenue of S$100m/150m/160m. Around 90% of CY18F revenue is secured (end-CY17 order backlog was S$90m) and we have built in c.S$10m of additional wins, which we believe is achievable given that DMHL’s all-time low contract win was S$13m in CY16. 
  • Management has guided for contract bids of at least c.S$500m currently in the market and given DMHL’s strong heritage in the topside module fabrication space, we believe it would secure at least 30% of these bids.
  • DMHL now guides for lower gross margins (GPM) of 19-20% in CY18-20F (vs. 23-30% previously) as the sector is still in recovery mode and customers are still cost conscious.
  • At net profit level, we forecast narrower losses in CY18F of S$3.5m. We have opted to be cautious on CY18F net profit despite our expectation that DMHL will report net profit for 9MCY18F (work on CY17 order book started in 1QCY18F and is expected to be completed by early 4QCY18F); as new contracts could only appear towards the latter part of the year, resulting in low yard utilisation for 4QCY18F. 
  • We believe DMHL would return to positive net profit of S$5.8m in CY19F, followed by S$8.1m in CY20F, due to operating leverage.

Improved cash flow generation 

  • Dyna-Mac Holdings (DMHL)’s operating cash flow generation is largely healthy, in our view (excluding CY14 which was negative due to a late billing cycle, while in CY17 it was hit by low orders executed), due to DMHL’s attractive working capital terms where depending on the size/tenure of the project, DMHL receives a downpayment of 10-15% on contract awards and thereafter payments are received according to milestones met.
  • Management has also guided that it is unlikely to invest in further yard capacity in the near-term; opting instead to rely on collaborations and leasing yard space from external sources (which we believe is ample at the moment) when the need arises.

Stronger balance sheet 

  • With twin benefits of improved operational cash generation and low capex, we believe DMHL can stay in a net cash position for CY18-19F. Moreover, it has also earmarked some assets for sale (S$32m) which, if sold, will enhance its cash pile, in our view. 
  • We project DMHL’s net cash to edge closer to c.S$60m in CY18F, after it sells two-thirds (S$21m) of its assets held for sale, and for CY18/19/20F net cash per share to improve to 4.6/5.5/6.5Scts (vs. 2.9Scts in CY17).


  • Given Dyna-Mac Holdings (DMHL)’s close strategic relationship with Keppel Corp (KEP), share price of Dyna-Mac and share price of Keppel Corp are highly correlated (RSI of 89.7%). 
  • In terms of valuations, we note that in the early days, DMHL’s P/BV was at a premium over KEP’s P/BV; but that has narrowed in recent years.
  • DMHL is trading at c.46% above its all-time low share price of S$0.09 in Aug 2016, which could appear lofty at first glance, but we argue that the low was hit when the small-cap oil and gas segment was first besieged by the failure of Swiber (Delisted). Following this, DMHL’s share price has traded within the S$0.11-0.185 range (since Sep 2016 to YTD). 
  • We believe small/mid cap stocks with healthy balance sheets (net cash/minimal net gearing) may be accorded a premium to peers in a sector upturn, hence we are slightly more bullish on its potential share price recovery prospects.
  • We initiate coverage on DMHL with an ADD call. Our Target Price is based on 1.8x CY18F P/BV, which is at a 30% discount to the book value ascribed to Keppel Corp of 2.5x given DMHL’s small-cap status. The PBV ascribed is also close to DMHL’s long-term CY12-17 average mean P/BV of 1.8x.


Lack of contract wins: 

  • Dyna-Mac Holdings (DMHL)’s earnings recovery is significantly linked to its ability to win contracts. Assuming contract wins fall short below S$120m, there is a potential that losses will continue. Having said that, survivability is not a key concern for us as we believe DMHL’s balance sheet is healthy. Timing then becomes the most crucial element, in our view.

Lower crude oil price: 

  • DMHL’s contract prospects are largely contingent on the award of FPSO contracts which can only increase in a better crude oil price environment.

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2018-03-21
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