Wah Seong’s core net profit came in below consensus and our estimates. The poorer-than-expected results were due to the recognition of lower margin products and services. We are trimming our FY12-13 forecasts by 11.3% and 5.3% respectively. However, we are upgrading Wah Seong to a BUY (previously NEUTRAL) as we rollover our valuations to FY13. We now value the share at RM2.26, based on the existing PER of 13x FY13 EPS.
Below expectations. Wah Seong’s core net profit came in below consensus and our estimates, making up 33.7% and 43.0% of consensus and our FY12 forecasts respectively. The poorer-than-expected results on a y-o-y basis were mainly due to the recognition of lower margin products and services, especially in its industrial trading and services segment. Nonetheless, both revenue (+8.7%) and core net profit (+10.2%) in 2QFY12 were higher sequentially due to better results from its oil & gas and renewable energy segment.
First interim dividend of 3.0 sen. In tandem with the release of its results, Wah Seong declared a first interim dividend of 3.0 sen which consist of i) gross dividend of 1.25 sen less 25% income tax, and ii) 1.75 sen tax exempt dividend. Incorporating the tax effects for its dividend, shareholders can expect to receive a net dividend of 2.69 sen per share, representing 41.4% of our full year dividend forecast.
Downgrading FY12-13 earnings forecast by 11.3% and 5.3% respectively. Our downgrade factors in the lower-than-expected 1HFY12 results and potentially slower profit growth in FY13.
Stake in Petra Energy could be positive for FY13. We are positive that its purchase of a stake in Petra Energy could be positive for Wah Seong in FY13. Wah Seong can now generate recurring income from Petra Energy’s brownfield services to complement its existing one-off pipe coating business. While contributions are small at this juncture, the synergistic exercise would enhance Wah Seong’s service offering to enhance its chances to secure more contracts.
Upgrade to BUY. We still think that FY12 will remain a tough year for Wah Seong as well as its peers due to the European economic crisis, which will lead to a slower new contract awards. Despite trimming our earnings estimates for FY12 and FY13, we are upgrading Wah Seong to a BUY (previously NEUTRAL) as we rollover our valuations to FY13. We now value the share at RM2.26 (previously RM2.06), based on the existing PER of 13x FY13 EPS. Our fair value implies a potential return of 24.2% based on its last closing price of RM1.82 (excluding dividend yield).
Source: OSK
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