Wah Seong Corporation - Looking at Petra Energy stake BUY

- We maintain our BUY call on Wah Seong Corporation with an unchanged sum-of-parts-based fair value of RM2.35/share, which implies a rolled-forward FY13F PE of 14x – an 18% discount to the oil & gas sector’s 17x for stocks with a market capitalisation of over RM1bil.

- The Edge Daily reported today that Wah Seong and Sarawakbased Pan Sarawak Holdings have emerged as frontrunners to acquire a strategic 26.9% equity stake in Petra Energy from Petra Perdana.  

- Petra Energy, an integrated brownfield services provider for the upstream oil & gas industry, offers maintenance and engineering services for offshore platforms, onshore civil engineering, marine offshore, design/fabrication, supply and installation services. Dato’ Bustari Yusof currently owns a 30% stake in Petra Energy, followed by Datuk Mohamed Nizam Abdul Razak (younger brother of Prime Minister Datuk Seri Najib Razak) with 9%. 

- Based on Petra Energy’s current market capitalisation of RM268mil, the stake could cost RM72mil. Such an acquisition should be easily funded internally, with Wah Seong’s net gearing slightly raised to 0.3x.

- The group currently has an outstanding order book of RM798mil (1.2x FY11 revenue) and tender book of RM2.4bil. Petra Energy currently trades at an attractive FY12F PE of 11x (based on street estimates), slightly lower than Wah Seong and a P/BV of 0.8x vs Wah Seong’s 1.4x. 

- We estimate that this acquisition, should it be successful, will raise FY13F net profit by 4% assuming full cash consideration and interest cost at 6%. Pending further clarity on this potential acquisition, we maintain FY12F-FY14F net profit.

- In our view, Wah Seong’s engineering services in gas compression equipment and equipment supply services could complement Petra Energy’s suite of services, which is currently targeting maintenance services for oil majors- potentially worth up to RM5bil over the next 3-5 years. 

- The new prospective orders cover hook-up construction & commissioning, topside major maintenance, underwater maintenance, operation & maintenance and offshore marine support services.  Petra Energy is also looking to provide services to marginal field operators, similar to Wah Seong’s strategy currently. Hence, we would be positive on  the acquisition, if it materialises.

- The stock currently trades at an attractive FY13F diluted PE of 10x, but uncertainties on the group’s 470,000ha oil palm plantation investment in the Republic of Congo could continue to cap interest in the near term.

Source: AmeSecurities