Wah Seong Corporation - Fresh recurring income prospect from Petra Energy stake HOLD

- We maintain our HOLD call for Wah Seong Corporation with an unchanged sum-of-partsbased fair value of RM1.86/share, which implies a rolled-forward FY13F PE of 13x – a 20% discount to the oil & gas sector’s 16x.

- Wah Seong has completed its acquisition of a strategic 26.9% equity stake in Petra Energy from Perdana Petroleum at RM1.68/share or RM97mil cash. But 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), which is high compared to the oil & gas industry’s 17x currently. This will have a negligible impact – assuming interest cost of 6% – on Wah Seong’s FY13F net profit.

- Recall that we are positive on the acquisition, which translates into 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. 

- Petra Energy, together with Bumi Armada, is currently in the running to participate in Coastal Energy’s marginal field risk-sharing contract for Kapal, Banang and Meranti, offshore Peninsular Malaysia. This should provide a new recurring income stream and fresh segment in the oil & gas value chain for Wah Seong. 

- Wah Seong’s business model currently does not generate significant synergy with Petra Energy’s operations currently. But Wah Seong’s engineering services in gas compression equipment and equipment supply services could later complement Petra Energy’s suite of services, which are currently targeting maintenance for oil majors – potentially worth up to RM5bil over the next 3-5 years. Petra Energy currently has an outstanding order book of RM798mil (1.2x FY11 revenue) and tender book of RM2.4bil.    

- The stock currently trades at a fair FY13F diluted PE of 12x, but uncertainties over 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