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Extracted from Annual Report 2016

Dear Valued Shareholders,

On behalf of the Board of Directors, it is with great pleasure that we present to you the Annual Report for Dayang Enterprise Holdings Berhad for the financial year ended 31 December 2016.

Dayang Group has always been proud to be able to maintain its impeccable track record of achieving record earnings, growing from strength to strength ever since our IPO in 2008 until 2015. However, 2016 has not been a good year for Dayang Group as our financial performance is reflective of the tough operating environment in the oil & gas industry due to a prolonged and depressed down cycle in the price of crude oil.

While Dayang can count its blessings for being involved in the brownfield maintenance services rather than the volatile exploration and production segment, we are not spared from the weak oil price. Having said that, we are grateful that our business operations still remained profitable, thanks to our unwavering focus to continuously improve our efficiency in cost optimisation and the effectiveness in streamlining our operations. In fact, our team members have been working tirelessly to execute the jobs which we believe is our core competitive advantage in hook-up commissioning and topside maintenance services that has always kept our flag flying high, despite the generally weak market.

Comparatively, Dayang is able to sustain the adverse effect of the industry slowdown as many of the oil & gas companies have incurred heavy losses in 2016. Our strong executional track record in hook-up commissioning and topside maintenance services has come in handy for us to weather the storm. While certain hook-up commissioning and maintenance contracts are carried out on a call-out basis, we continue to demonstrate our high dedication to deliver the best value to our customers. The lower work orders throughout the year have also served as a timely reminder for us not to rest on our laurels, but to continue to strive for better operational excellence.

Also, our integration with Perdana Petroleum Berhad ("PPB") since the completion of take-over in Aug 2015 has been running smoothly. We take cognizance of the challenging outlook for the offshore supply vessels (OSV) market, but the acquisition of PPB was made in the interest of our Group's long-term sustainability as we believe this is a strategic fit into Dayang's core business. In addition, we maintain our long term view that Dayang Group will be transformed into a larger maintenance services player with undisputed leading market position in Malaysia. The prevailing soft market will not dent our aspiration to grow the company into a formidable regional player.

At this juncture, we would like to take this opportunity to express our heartfelt appreciation to all our dedicated Board of Directors, management team and employees who continue to place their faith with the company. Dayang continues to keep the interest of its team members at the top of priority as they are the cornerstone of the success of Dayang all these years. Riding on the strong foundation, we are confident that the company will continue to achieve good results going forward. Our strong order book of RM2.8bn (most of the contracts on call-out basis) will provide strong earnings visibility over the next two years, and hopefully we will even emerge stronger after this tough time.

Business and Operations review

Our business operations in 2016 suffered from low vessel utilisation and work orders as the low crude oil prices took its toll on the oil & gas industry. We had undertaken a comprehensive overview of our business to optimise our resources on our core competency of hook-up commissioning and topside maintenance services. At our 98%-owned subsidiary, PPB, the positive results of a right-sizing and restructuring exercise were reflected in 2016 as the lower overhead costs resulted in much lower administrative expenses. Across all facets of Dayang Group, the administrative expenses dropped significantly by about 13%.

Dayang has been focusing on execution and ensuring smooth and timely delivery of its jobs to our key clients as track record is of utmost importance in this competitive industry. Throughout 2016, we have deployed our resources to support our clients in executing the HUC, EPCC and maintenance works, including the vessels which are sourced from PPB and within another subsidiary, DESB Marine Sevices. Notably, in the first half of 2016, major oil and gas clients have been rather slow in rolling out its work orders which could be attributed to the soft crude oil prices. However, our diversified portfolio of client profile has helped to offset the impact of a slower first half of 2016. In the second half of 2016, it is pleasing to note that more work orders started to flow stemming from more maintenance activities from all the call-out contracts in Dayang's order book.

The synergistic tie-up with PPB has ensured Dayang will always have access to adequate and reliable vessel supply to position itself to take on engineering and construction projects. The combined expertise of Dayang and PPB will further enhance its competitive advantage. While demand for offshore supply vessels is tepid at this juncture, we are cautiously optimistic that we will be able to further improve our vessel utilisation this year in view of the healthy oil price recovery which has more than doubled from a 13-year low of USD27 per barrel to USD53 per barrel.

In April 2016, Dayang secured a RM42m contract from Kebabangan Petroleum Operating Company Sdn Bhd (KPOC) for the provision of topside maintenance services for two years and an extension option of one year. The securing of the contract marks the strong confidence the customer has on our execution capability and also its competitive edge.

Financial review

For the financial year 2016, Dayang continued to be profitable despite the challenging environment. It is indeed an advantage for us to be mainly involved in the brownfield maintenance services as the work orders were still awarded, albeit on a smaller scale compared to previous years. The bank borrowings of about RM674m for the acquisition of PPB also meant higher interest expenses and this further eroded its bottomline. Meanwhile, the losses at PPB due to weaker vessel utilisation also contributed to our lower earnings. Therefore, our net profit after tax came in at RM53.9m, compared to RM171m in the financial year 2015. Also, Dayang's financial year 2016 revenue dipped 9% year-on-year to RM708m from RM779m, reflecting the lower value of work order received and performed during the year as well as lower vessel utilisation rate.

Dayang's balance sheet remained stretched with net gearing standing at 1.28x, largely due to borrowings taken to finance our acquisition of PPB in 2015 and also the consolidation of PPB's debts. We had also converted the bulk of our USD loans into Shariah compliant borrowings via the issuance of Sukuk Murabahah of up to RM635m. This has resulted in unrealised foreign exchange gain of RM75.6m. Also, on hindsight, it has proven to be a right move for us to convert our USD borrowings into MYR debt as USD has continued to appreciate against MYR. In terms of shareholders' fund, it has grown slightly to RM1.27bn in financial year 2016 from RM1.19bn in financial year 2015, in tandem with our corresponding financial results. Meanwhile, cash flow generated from operating activities remained high at RM329m, compared to RM291m in the previous financial year. Overall, for 2016, optimising cash flow management has also helped us to improve our net gearing from 1.5x in the financial year 2015 to 1.28x as at Dec 2016.

Corporate exercise

There was no cash dividend proposed for the financial year 2016 as we remained focus on maintaining a sustainable balance sheet via careful cashflow management.

Concerted effort has also been taken by the Group to further improve our balance sheet. The proposed private placement of up to 10% of new shares announced in Feb 2017 is on-going and will help to pare down our borrowings. At PPB, we are also considering to embark on a fund-raising exercise to address our gearing levels to ensure sustainability of our vessel-chartering business.

Prospects

Fellow shareholders, we believe that the tough business environment will remain in 2017 despite the recovery of crude oil prices from its lows. Nevertheless, we are cautiously optimistic that oil majors will be encouraged to increase their spending in view of the stabilised crude oil prices.

We still have call-out contracts estimated at RM2.8bn which will at least last until 2018. In addition, we have an outstanding tender book of approximately RM5bn where most of the jobs are related to maintenance services. We are hopeful of a favourable outcome for the tenders as Dayang could leverage on its strong outstanding track record and experience to its customers. Our streamlined operations, following our group-wide restructuring, will position us in good stead to remain profitable in spite of the low oil price environment

Acknowledgements

On behalf of our Board of Directors, we wish to express our sincere thanks to all our stakeholders who have played critical roles in helping us to stay afloat during financial year 2016. The strong confidence from our valued clients and business associates helps us to go from strength to strength and the quality delivery from our vendors and suppliers ensure our formidable track record remains intact. To our bankers, financiers and investors, we thank you for your continued support and trust in Dayang Group.

Last but not least, to our management and employees, thank you very much for your hard work that helped us "Focus Towards Excellence"! Your loyalty with the Group during these difficult times will not go unnoticed as we strive to steer towards greater heights in the future together.

Thank you

Ali Bin Adai
Independent Non-Executive Chairman

Tengku Dato' Yusof Bin Tengku Ahmad Shahruddin
Managing Director

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