Wah Seong’s 9MFY12 earnings came in below expectations, accounting for 50.2% of our and 49.4% of consensus full-year estimates. The weaker-than-expected earnings were mainly due to the larger number of lower margin projects being executed in its oil & gas division and inventory write-downs in its industrial trading & services division. In line with our earnings downgrade, we are trimming our FV from RM2.33 to RM2.13 but our BUY call is maintained as we are still of the view that the company could recover strongly in FY13.
Below our and consensus estimates. Wah Seong’s 9MFY12 results came in below both our and consensus forecasts, accounting for only 50.2% of our and 49.4% of consensus full-year estimates. Net profit dipped 52.7% q-o-q and 47.9% y-o-y, largely due to i) larger number of lower margin projects being executed during this period in its oil & gas segment, and ii) write-down of inventories in its industrial trading & services segment. Revenue also dipped 7.8% q-o-q due to delays in the commencement of anticipated projects and new contracts. This is in line with the lower EBIT margin recorded (YTD FY12: 5.7% vs YTD FY11: 11.4%). In line with its weaker earnings, we are lowering our FY12-13 earnings forecasts by 22.3% and 7% respectively.
Cyclical project-based earnings; FY13 outlook brighter. The group’s current orderbook amounts to some RM1bn comprising RM552m in its oil & gas segment, RM275m for its renewable energy segment and RM190m for its industrial trading & services segment. Management is currently bidding for a few projects, the notable being in: i) Turkmenistan (phase 2) worth USD55m-USD60m, ii) North Malay Basin, for which the value is yet to be finalised at this juncture, and iii) Australia (value and details undisclosed). These projects would contribute positively to the group’s earnings in FY13/14 should the company succeed in its bids. We also understand from management that its closest competitor, Brodero Shaw is facing capacity constraints, which resulted in a significant increase in enquiries for Wah Seong’s services for next year. Management guided that there should be no issues with regards to capacity as its Kebabangan and Asia Pacific LNG projects are expected to be completed by early next year, freeing up capacity in its Kuantan plant.
Maintain BUY. In line with our earnings downgrade, we are trimming our FV from RM2.33 to RM2.13. That said, our BUY recommendation is maintained as there is still 18.3% upside to our valuations. We advocate investors to stay invested in the stock as the outlook for FY13 remains positive. Key rerating catalysts from now onwards include i) better-than-expected contributions from its 26.9% stake in Petra Energy, and ii) better-than-expected contract flows, which could enhance its earnings in FY13/14.
FYE Dec (RMm)
|
FY09
|
FY10
|
FY11
|
FY12f
|
FY13f
|
Revenue
|
1950.3
|
1523.4
|
1889.1
|
1927.5
|
2107.8
|
Net Profit
|
121.3
|
56.0
|
110.4
|
73.3
|
117.7
|
% chg y-o-y
|
5.0
|
-53.9
|
97.2
|
-33.6
|
60.6
|
Consensus
|
-
|
-
|
-
|
95.9
|
119.5
|
EPS
|
15.7
|
7.2
|
14.2
|
9.5
|
15.2
|
DPS
|
7.5
|
4.5
|
6.0
|
6.5
|
7.0
|
Dividend yield (%)
|
4.2
|
2.5
|
3.3
|
3.6
|
3.9
|
ROE (%)
|
14.5
|
6.1
|
11.4
|
7.2
|
10.9
|
ROA (%)
|
5.6
|
2.7
|
5.1
|
3.1
|
4.8
|
PER (x)
|
11.5
|
24.9
|
12.6
|
19.0
|
11.9
|
BV/share
|
1.10
|
1.14
|
1.18
|
1.24
|
1.34
|
P/BV (x)
|
1.6
|
1.6
|
1.5
|
1.5
|
1.3
|
EV/EBITDA (x)
|
5.6
|
10.6
|
7.2
|
9.4
|
7.3
|
Results Table (RMm)
FYE Dec
|
3Q12
|
2Q12
|
Q-o-Q chg
|
YTD FY12
|
YTD FY11
|
Y-o-Y chg
|
Comments
|
Revenue
|
482.6
|
523.6
|
-7.8%
|
1,487.7
|
1,374.9
|
8.2%
|
Lower q-o-q due to delays in the start of anticipated projects, which was delayed or deferred by customers
|
EBIT
|
13.1
|
40.5
|
-67.6%
|
85.3
|
156.1
|
-45.4%
| |
Net interest expense
|
-5.3
|
-5.5
|
-4.7%
|
-16.2
|
-17.1
|
-5.5%
|
Higher due to higher borrowings taken to purchase the 26.9% stake in Petra Energy
|
Associates
|
7.1
|
-0.7
|
>100%
|
3.7
|
0.9
|
>100%
| |
PBT
|
14.9
|
34.3
|
-56.4%
|
72.8
|
139.8
|
-47.9%
|
Lower q-o-q and y-o-y due to lower margin projects executed in its oil & gas segment and write-down in inventories in its industrial trading & services segment
|
Tax
|
-8.5
|
-8.2
|
4.0%
|
-16.2
|
-29.1
|
-44.4%
| |
MI
|
3.1
|
-6.0
|
>100%
|
-9.4
|
-19.8
|
-52.8%
| |
Net profit
|
9.5
|
20.0
|
-52.7%
|
47.3
|
90.9
|
-47.9%
|
In line with lower PBT
|
EPS
|
1.3
|
2.6
|
6.1
|
11.7
| |||
DPS
|
0.0
|
0.0
|
0.0
|
0.0
| |||
EBIT margin
|
2.7%
|
7.7%
|
5.7%
|
11.4%
|
Lower due to more lower margin jobs executed
| ||
NTA/Share
|
1.14
|
1.17
|
1.14
|
1.05
|
EARNINGS FORECAST
FYE Dec (RMm)
|
FY09
|
FY10
|
FY11
|
FY12f
|
FY13f
|
Turnover
|
1950.3
|
1523.4
|
1889.1
|
1927.5
|
2107.8
|
EBITDA
|
337.2
|
175.7
|
263.0
|
213.8
|
270.7
|
PBT
|
245.8
|
86.2
|
173.3
|
110.1
|
176.0
|
Net Profit
|
121.3
|
56.0
|
110.4
|
73.3
|
117.7
|
EPS
|
15.7
|
7.2
|
14.2
|
9.5
|
15.2
|
DPS
|
7.5
|
4.5
|
6.0
|
6.5
|
7.0
|
Margin
| |||||
EBITDA (%)
|
17.3
|
11.5
|
13.9
|
11.1
|
12.8
|
PBT (%)
|
12.6
|
5.7
|
9.2
|
5.7
|
8.3
|
Net Profit (%)
|
6.2
|
3.7
|
5.8
|
3.8
|
5.6
|
ROE (%)
|
14.5
|
6.1
|
11.4
|
7.2
|
10.9
|
ROA (%)
|
5.6
|
2.7
|
5.1
|
3.1
|
4.8
|
Balance Sheet
| |||||
Fixed Assets
|
893.7
|
793.8
|
759.7
|
735.3
|
715.1
|
Current Assets
|
1313.2
|
1215.9
|
1535.9
|
1624.0
|
1848.9
|
Total Assets
|
2206.9
|
2009.7
|
2295.6
|
2359.4
|
2564.1
|
Current Liabilities
|
671.8
|
500.8
|
808.6
|
823.5
|
835.5
|
Net Current Assets
|
641.4
|
715.1
|
727.3
|
800.6
|
1013.5
|
LT Liabilities
|
500.5
|
458.3
|
389.3
|
397.3
|
295.3
|
Shareholders Funds
|
885.6
|
935.5
|
1004.1
|
1044.9
|
1119.6
|
Net Gearing (%)
|
31.6
|
28.0
|
18.6
|
21.9
|
20.2
|
Source: OSK
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