Wah Seong Corporation - Project delays hurt 3Q12 earnings

Period    3Q12/9M12

Actual vs. Expectations    3Q12 net profit of RM9.5m brought 9M12 net profit to RM47.3m. This was a dismal set of results as it only accounted for 53.6% of our full-year net profit estimate (RM88.3m) and 49.3% of consensus estimates (RM95.6m). 

 The results were significantly below expectations mainly due to losses in both its oil and gas and industrial and trading services.

Dividends   No dividend was declared during the quarter.

Key Results Highlights   QoQ, the revenue was down 25.2% due to a drop in revenue from the oil and gas division (given that the Turkmenistan project was delayed to 2013 and the Gorgon project being completed in 1H2012). However, the net profit was even more significantly hit (-52.7%) as: 1) low margin projects affected the oil and gas division; and 2) the industrial services segment was hit by some inventory write-downs. 

 YoY, the 55.5% net profit drop was based on similar reasons as above.

Outlook   We do not expect 4Q12 earnings to be significantly better vs. 3QFY12 as the company’s main gamechanger projects (Turkmenistan and North Malay Basin) will likely only kick-start in 2013. 

 Given that some projects have already been awarded for North Malay Basin (FPSO and fabrication), it is likely we will hear of the pipecoating projects soon.  

 The pipe-coating plant in Louisiana (JV with Insituform) is tentatively scheduled to commence operations in the 1Q-2Q of 2013.

Change to Forecasts    Given that we are expecting an uninspiring 4Q12 performance, we cut our FY12 earnings by 36.3% to RM56.4m. 

 However, we are maintaining our FY13-14 earnings for now as we expect the new projects to support the earnings in the next two financial years. That said, if there continues to be delays in its projects, we will review or trim our forecasts further. Note that our FY13 earnings estimates are already lower than the consensus by 10%.

Rating  Downgrade to MARKET PERFORM

Valuation    We are trimming our CY13 target PER even lower to 12.5x (from 14x previously), which is a further discount to average sector PER of 15x given the heightened uncertainty surrounding the stock. As such fair value is now RM1.78 PER.

Risks   Inability to secure more contracts going ahead.

 Lower than expected margins.

Source: Kenanga