Wah Seong Corporation - Higher 2Q12 but still below expectation

Period    2Q12/1H12

Actual vs. Expectations

 The 2Q12 net profit of RM20.0m brought Wah Seong’s 1HFY12 net profit to RM37.8m.

 The results were below expectations, making up only 32.7% and 32.9% of ours (RM115.7m) and the consensus’ (RM114.9m) full year estimates. 

 Although there was a sequential improvement in earnings, 1H12 margins were lower than expected largely due to lower margins from the oil and gas division as the company completed the tail-end of its Gorgon project in the quarter.

Dividends   A NDPS of 2.7 sen was declared in the quarter.

Key Results Highlights

 YoY, the 2Q12 net profit was down 23.5% as the Gorgon project (which carried premium margins) was completed and resulted in lower EBIT margins for the oil and gas division. EBIT margins fell by 3.7ppts to 10.9% (from 14.6%).

 QoQ, the NP was up by 12.7% mainly due to the tail-end Gorgon project being recognised in the quarter. Recall that the Gorgon project was not executed in 1Q12.

Outlook   The oil and gas division prospect could remain subdued in 2HFY12 as the main project pipeline (APLNG and Kebabangan) have lower GP margins versus the Gorgon project. Its Turkemenistan project has also been delayed to 2013 on the back of late pipes delivery.

 2013 prospects are expected to better on the back of projects like the North Malay Basin (expected to be awarded end-2012 to early-2013) and the startup of WASEONG’s pipe-coating plant in Louisiana (JV with Insituform).

 Its future prospects will also increase with the improvement in Petra Energy’s earnings.

Change to Forecasts

 Given the lacklustre earnings to date, we have trimmed our FY12-14 pipe-coating division GP margins to 23%-26% (from 28%). We have also included FY12-14 associate earnings (26.9% stake) from Petra Energy (NOT RATED) of RM1.8m, RM8.1m and RM9.0m respectively based on the consensus estimates. Overall, we have cut our NP estimates by 24%, 11% and 5% respectively.

Rating  Maintain OUTPERFORM

Valuation    With the downgrades in our earnings forecasts, we have trimmed out fair value on the stock to RM1.99 (from RM2.23) based on an unchanged 14x targeted PER (being at a 1.0x discount to the average sector PER of 15x given the uncertainty in the earnings).

Risks   Inability to secure more contracts going ahead.

 Lower than expected margins.  

Source: Kenanga