OCBC Investment Research analyst Ada Lim has kept “buy” on Dyna-Mac Holdings NO4 with a higher fair value estimate (or target price) of 41.5 cents from 37 cents previously.
In Lim’s report dated June 16, she notes that the recent upcycle in the offshore and marine (O&M) sector might be stronger than expected, referring to her initiation report on May 12, where she noted that the sector’s long-term fundamentals remain sound.
At the time, she said that the demand for energy is expected to grow, due largely to growth in Asia and years of catch-up spending.
“According to the 2023 Rystad Energy FPSO Industry Report, investments in the offshore oil and gas (O&G) sector resurged by 16% in 2022, and are projected to grow by another 16% this year, representing a decade-high year-on-year (y-o-y) capital expenditure (capex) growth of US$21 billion ($28.23 billion),” says Lim.
FPSO stands for floating production storage and offloading unit.
“There have also been supportive headlines from the wider industry, such as oil major Shell’s recent announcement of plans to spend US$13 billion annually on its upstream and liquefied natural gas (LNG) business through 2030, equating to more than US$100 billion over the remainder of the decade,” she adds.
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In her latest report, Lim also notes strong catalysts for Dyna-Mac including its strong balance sheet, healthy net cash position, which she sees the company using to expand its existing yard space or to acquire synergistic peers in a manner that’s accretive to its earnings.
Lim also highlighted Dyna-Mac’s recent interview with The Edge Singapore where CEO Lim Ah Cheng shared that the company’s management is open to increasing its dividend pay-out ratio to as high as 50% under the right conditions. The CEO also said that the company was open to share buybacks.
“We note that Dyna-Mac has been amongst the top institutional net buy stocks recently, part of which can perhaps be attributed to an ongoing rotation from financials into industrials and capital goods names,” says Lim.
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“Dyna-Mac certainly stands out amongst its peers given its resilient growth profile and strong net cash position. Institutional funds tend to be stickier, which could provide some support for Dyna-Mac’s share price in the longer term,” she adds.
With all these in mind, Lim says she has adjusted her model to reflect expectations that Dyna-Mac will secure bigger orders in terms of dollar value going forward.
“We think this is achievable given the strong upcycle and the fact that Dyna-Mac had already secured firm contracts worth $270 million from repeat customers in May 2023, which represents the total orders that it secured in the whole of FY2022,” states Lim.
“Dyna-Mac currently has a net order book of $609.1 million, with deliveries stretching into 2025,” she adds. “We maintain our key assumptions (cost of equity at 8.67% and terminal growth rate of 2%) and, using the discounted cash flow (DCF) model, derive a higher fair value estimate of 41.5 cents.”
“Despite its recent rally, Dyna-Mac is trading at a FY2023 and FY2024 price-to-earnings (P/E) ratio of 19.4x and 15.2x, which are still around one-tenth and slightly more than half a standard deviation (s.d.) below its five-year historical average of 20.7x respectively. We think this still presents an opportunity for investors to gain exposure to the FPSO upcycle through a local small-cap proxy,” says Lim.
As at 3.15pm, shares in Dyna-Mac are trading 0.3 cents higher or 0.8% up at 37.8 cents.
