Wah Seong Corporation - Lack of new pipe-coating jobs to replace Gorgon HOLD

- We maintain our HOLD recommendation for Wah Seong Corporation, with a lower sum-of-parts-based fair value of RM1.81/share (vs. an earlier RM1.86/share), which implies a rolled-forward FY13F PE of 12x – a 25% discount to the oil & gas sector’s 17x.

- We have cut Wah Seong’s FY12F earnings by 15% as the group’s 9MFY12 net profit of RM47mil (-48% YoY) came in below expectations, accounting for 58% of our earlier forecast of RM81mil and 49% of street estimate’s RM96mil. We have cut the group’s FY13F-FY14F earnings by only 2% as we expect fresh new jobs early next year to boost Wah Seong’s margins.  

- Despite a recognition of negative goodwill on acquisition and maiden contributions of 27%-owned Petra Energy, the group’s 3QFY12 net profit fell 53% QoQ to RM9mil due to a RM3mil loss (vs. a pre-tax profit of RM27mil in 2QFY12 from lumpy revenue recognition of the Gorgon job in Australia) in the oil & gas division due to insufficient highmargin pipe-coating jobs to replace the fast-depleting billings of the RM551mil pipe-coating job for the Gorgon project, which is nearing completion. 

- We understand that the group expects to secure a US$20mil pipe-coating job in Australia soon, as well as phase 2 of Turkmenistan’s Central Diyabekir project, potentially worth up US$50mil. Newsflow for new domestic pipe-coating jobs may only begin to emerge next year, such as the second phase of the North Malay basin gas cluster and other East Malaysian projects.

- But for 4QFY12, we do not expect significant earnings improvement as any new jobs will only commence next year. Additionally, there could be some lumpy contributions from the green-field Congo palm oil plantation project in 4QFY12 arising from the initial forest clearance.  But as any estimates for these activities are premature at this stage, we have only incorporated Wah Seong’s existing oil & gas, renewable energy and industrial trading activities into our projections. 

- The group secured less new orders in 3QFY12, which led to an 8% QoQ decline in order book to RM1bil currently. Wah Seong had secured less oil & gas related jobs vs. its other divisions, which caused the oil & gas services share to fall from 56% to 54% of the group’s outstanding order book (See Chart 1). 

- Wah Seong’s recent investment in the 27% equity stake in Petra Energy remains a positive development as its potential stake in the small field risk-sharing contract with Coastal Energy for the Kapal, Banang and Meranti fields is likely to sustain interest in the stock. 

- The stock currently trades at a fair FY13F diluted PE of 12x (vs. the 3-year range of 10x-13x), 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