Friday 15 June 2012

Wah Seong Corp - OUTPERFORM - 14 JUNE 2012


News    The Edge Daily today mentioned that Wah Seong (“WASEONG”) had emerged as one of the frontrunners to acquire the 26.9% equity stake equity interest in Petra Energy Bhd “PENB” that Perdana Petroleum is looking to pare off.

 Deputy managing director, Giancarlo Maccagno has acknowledged the company was interested in the block but has yet to make an official bid.

 The other contender is Pan Sarawak Holdings, a Sibu-based management services provider.

 At Petra Energy’s closing share price of RM1.25/share, the stake is worth RM72m.

Comments   Neutral. We are surprised at the news as this will be a totally different direction for WASEONG as Petra Energy is in the brownfield services industry, which caters to hook-up and commissioning and maintenance works.

 That said, the RM72m consideration will not be too much of a stretch for the company given its cash and equivalents of RM579m. Even at RM1.50/share (which we believe is the book value of the Petra Energy shares in Perdana Petroleum), the full stake will only cost WASEONG around RM86.6m (+RM14.4m), which we believe is still manageable. 

 We take this as a sign that the company is activelylooking to diversify its service range, which in the longer run could be beneficial given that the pipecoating industry looks highly competitive after its main competitor Bredero-Shaw took over ailing Italian company Socotherm. 

 However, this would be contingent on Petra Energy securing more projects going ahead.  Consensus pegs Petra Energy’s net profit at RM23.6m, which would accrete RM6.4m (26.9% stake) to WASEONG, if bought over.

Outlook   Short-term project replenishment will be fuelled by domestic projects like the North Malay Basin and pipeline replacement due to Petronas’ asset rejuvenation plans. 

 Longer term, its pipe-coating plant with Louisiana (JV with Insituform) will enhance its reach in the Gulf of Mexico.

Forecast   Maintain earnings estimates at this juncture pending more information on the above matter.

Rating  MAINTAIN OUTPERFORM

Valuation    We maintain our TP of RM2.23 based on a targeted 14x FY13 PER.  

Risks   Inability to secure more contracts going ahead.
 Lower than expected margins.

Source: Kenanga 

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