• Expect contract wins from key customers
• FPSO segment outlook still positive
• Retain FV but downgrade to HOLD

Likely beneficiary of key customers’ recent order wins

Bumi Armada Berhad, one of Dyna-Mac Holdings’ key customers, recently announced the signing of the Angola Block 15/06 FPSO project worth ~MYR9.6b from Eni Angola S.p.A., and the receipt of a Letter of Intent together with its JV partner for the Madura FPSO project in Indonesia amounting to ~MYR3.76b. Given that Bumi Armada has mentioned before that its high-end modules fabrication work will be performed by DynaMac, we expect future contract wins by the latter in the foreseeable future. Meanwhile, BW Offshore signed a contract in May this year with Premier Oil for a FPSO to operate on the Catcher oil field in the UK North Sea. We believe Dyna-Mac stands a good chance to secure the order for the engineering, procurement and construction (EPC) of the topside modules, as BW Offshore highlighted that the conversion and integration of the FPSO will be carried out in Singapore.

FPSO tendering activities still healthy

Crude oil prices have dipped recently due to the USD appreciating and the easing of geopolitical tensions. Nevertheless, we remain positive on the long-term outlook on the oil and gas sector, given our expectations that global oil demand will continue to grow. The current order backlog for floating production systems consists of 65 units, of which 37 are FPSOs. SBM Offshore, currently the largest FPSO player globally, estimates that there would be 12 FPSO awards in 2014 (5 handed out in 1H14), versus 10 awarded in 2013. This is projected to further increase to 13 awards in 2015.

Share price has performed well; downgrade to HOLD

Dyna-Mac’s share price has appreciated 14.5% since we last reiterated our ‘Buy’ rating on 18 Aug 2014, far surpassing the FTSE Oil and Gas Index and STI’s -0.5% and 1.0% respective movement during the same period. At its current price level, potential total returns appear limited at 6.9%, versus our unchanged fair value estimate of S$0.445 (pegged to 15x blended FY14/15F EPS). Hence, we downgrade Dyna-Mac to HOLD on valuation grounds. Notwithstanding our downgrade, we believe Dyna-Mac’s share price will continue to be supported by its healthy FY14F dividend yield of 4.6%.

Source: OCBC Research - 5 Sep 2014