Dyna-Mac Holdings

Undervalued compared to global peers

Maybank Securities analyst Jarick Seet has initiated coverage on Dyna-Mac with a “buy” call and a target price of 35 cents, which is based on its FY2023 P/E of 9.5x ex-cash.

At its current share price, Seet believes the company is “significantly undervalued” as the company’s global peers are valued at 28.6x instead.

In Seet’s view, the engineering services firm is in an “enviable position” to capture the surge in floating production storage and offloading (FPSO) demand.

“There’s a shortage of FPSO capacity in the industry due to the lack of investment in the oil & gas (O&G) sector since 2016 and the attrition of competitors,” writes Seet, who notes that the long-term fundamentals of the O&G sector remain “sound”.

The high sustained prices in crude oil as well as

the projected increases in offshore exploration and production spending have resulted in Dyna-Mac’s orderbook of $412.3 million as at Dec 31, 2022.

“We expect demand to remain strong in the next few years and Dyna-Mac could win larger orders (of over $300 million) with potentially higher margins,” the analyst adds.

In his report dated April 17, Seet is also positive about Dyna-Mac’s new management, in particular, its CEO Lim Ah Cheng, who joined the company in March 2020.

Under Lim’s watch, Dyna-Mac saw a turnaround in profitability, ending the FY2021 ended Dec 31, 2021, with earnings of $5.6 million. In FY2022, the company reported earnings of $13.2 million.

This was a reversal from the $24 million loss in FY2019 and the $58.4 million loss in FY2020 when the Covid-19 pandemic struck.

Seet is particularly impressed with Dyna-Mac’s improved cash position due to the restructuring of its payment terms with suppliers and customers.

“The company now requests 30%-50% upfront payment for contracts versus only 10%-20% before commencing steel works,” he writes.

M&As are also a possibility for Dyna-Mac thanks to its strong net cash position with no debt. As at end-December 2022, Dyna-Mac reported $185.4 million in cash and cash equivalents.

“Management says it’s keen to explore inorganic growth which we suspect to be in the O&G industry with recurring revenue,” says Seet.

“As Dyna-Mac is operating at close to full capacity, we think it may acquire more land to increase it yard capacity by 30% by the end of FY2023,” he adds.

Moving forward, the analyst is expecting Dyna-Mac’s shareholders to be rewarded with “much higher” dividends. Share buy backs are also a possibility with the company.

As he sees Dyna-Mac riding on the tailwinds of the O&G sector, Seet is forecasting CAGR for earnings of over 30% over the next two years. —