Wah Seong Corporation - Marginal impact from 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.

- Wah Seong has acquired a strategic 26.9% equity stake in Petra Energy from Perdana Petroleum at RM1.68/share or RM97mil cash, which is at a 9% premium to Petra Energy’s closing price.

- We maintain Wah Seong’s forecasts as the acquisition price for the stake in Petra Energy translates into an FY13F PE of 20x (based on consensus estimates). This will have  a negligible impact, assuming interest cost of 6%, on Wah Seong’s FY13F net profit.

- But we view the consideration as fair with a price/book ratio of 1x vs. Wah Seong’s 1.3x. We estimate that the group’s end-FY12F net gearing will rise from 0.3x to a still manageable 0.4x. 

- 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%. 

- Petra Energy currently has an outstanding order book of RM798mil (1.2x FY11 revenue) and tender book of RM2.4bil. In our view, Wah Seong’s engineering services in gas compression equipment and equipment supply servicescould complement Petra Energy’s suite of services, which are currently targeting maintenance services for oil majors- potentially worth up to RM5bil over the next 3-5 years. 

- Petra Energy’s new prospective orders cover hook-up construction & commissioning, topside major maintenance, underwater maintenance, operation & maintenance and offshore marine support services.  

- We understand that Petra Energy is also looking at providing services to marginal field operators, similar to Wah Seong’s strategy currently. This associate stake in Petra Energy is expected to enable Wah Seong to diversify its range of operations as well as penetrate new markets by leveraging on the group’s support services to the industry.

- The stock currently trades at an attractive FY13F diluted PE of 11x, 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