• Dyna-Mac Holdings (SGX:NO4) is an Engineering, Procurement & Construction (EPC) service provider primarily for the fabrication of offshore floating production storage offloading (FPSO) and floating storage offloading (FSO) topside modules.
• FPSO is a floating facility used by companies in the oil & gas industry to extract crude oil from offshore regions. It has processing and storage capabilities which makes it suitable for deployment to deep water ( > ~500m) where pipeline infrastructures are costly and non-feasible to construct. Other fabrication works done by Dyna-Mac include structural modules for other offshore and onshore energy facilities.
• Dyna-Mac leases 2 yards for its fabrication activities, a main yard at Gul Road and a west yard at Pandan Crescent. Both yards have a combined gross area of ~140,300 m2 and a maximum annual fabrication capacity of ~25,000 tons. Leases for both yards expire in 2030 and 2034 respectively.
• Dyna-Mac’s customers are mainly major EPCI (Engineering, Procurement, Construction, and Installation) contractors and operators/owners of FPSO in the O&G industry. Dyna-Mac has a longstanding relationship with its existing customers including SBM Offshore and Modec, however, this also contributes to high customer concentration risk. 2 customers - SBM Offshore and Keppel Shipyard (KSL) accounted for 87% of FY21 total revenue.

Booming FPSO Market

• In view of higher oil prices and pressing energy security needs, upstream players are inclined to ramp up oil production. FPSO market is a huge beneficiary of this development as production assets are moving towards deeper water.
• State-owned Brazilian oil producer Petrobras is spending US$57.3b on E&P activities which include the construction of 15 new FPSO targeted to come on stream over the next 5 years. Of the 15 units, 3 remain for tender. Rystad Energy expects ~10 FPSO contracts to be awarded in 2022 with Brazil leading the market. SBM sees FPSO contract awards to reach 25 by end 2023.
• Riding the upturn in the market, Dyna-Mac has secured ~S$270m orders year-to-date, bringing its total net orderbook to S$641m. This translates to stable revenue flow and earnings into FY2024. We expect robust market demand to sustain its order win momentum.

Dyna-Mac Operates in a Highly Competitive Environment

• Dyna-Mac's competitors are state-backed Chinese shipbuilders like China Offshore Oil Engineering Company (COOEC) and Shanghai Waigaoqiao Shipbuilding (SWS). Dyna-Mac's competitive edges are its longstanding experience in topside module fabrication projects and its timely delivery of the modules.
• Recent lockdowns in China have disrupted the production schedules of Chinese shipyards. Further interruptions could see FPSO operators/owners favor non-Chinese players such as Dyna-Mac.

Dyna-Mac and Its Listed Chinese Peers Are in Net Cash Position

• Dyna-Mac saw a turnaround in profitability in FY21 with PATMI of S$0.9m, adjusted for government grant, write-back of PPE impairment and tax credit. Its share is trading at P/B of 7.6x and FY21 EV/EBITDA of 9.0x.
• Despite the challenging environment, Dyna-Mac has maintained a net cash balance for the past 5 years and started generating positive operating and free cash flow since FY2019, thus further growing its cash pile. Its net cash balance grew to S$114m in 1Q22. The net cash balance includes contract liabilities amounted to S$90.7m, which are advanced receipts for work to be performed.   

Comparables

• Both BOMESC Offshore Engineering and Chinese Offshore Oil Engineering Company (COOEC) are in net cash positions (S$95m and S$108m). Other major non-listed Chinese players are Cosco Shipping Heavy Industry, Yantai CIMC Raffles and Shanghai Waigaoqiao. These players are backed by state-owned enterprises.

Source: SAC Capital Research - 29 Jun 2022