Wah Seong Corporation - Below Estimates

Period  4Q12/12M12

Actual vs. Expectations  4Q12 net profit of RM5.2m brought FY12 net profit to RM52.3m. This was slightly below our net profit forecasts accounting for 93% of our RM56.4m estimates. However, it was significantly below consensus estimates (accounting for only 83%) of FY12 estimates (RM62.9m).

 The variance to our full-year estimates is due to lower-than-expected PBT margins on the company’s operations and a surprise loss from its associate –Petra Energy Bhd (Not Rated).

Dividends  During the quarter, it declared 1) NDPS of 2.5 sen,bringing full-year NDPS to 5.1 sen slightly above our assumption of 5.0 sen; 2) distribution of treasury shares as special share dividend on the basis of 1-for-110, implying 0.9% yield.

Key Results Highlights  QoQ, 4Q12 net profit was down by 44.7%, mainly due to losses from the WASEONG’s associate – Petra Energy, which saw a loss of RM2.4m in the current quarter (versus RM7.1m in 3QFY12).

 YoY, the 4QFY12 net profit fell 73.2% due to lower earnings from all divisions barring renewable energy. Oil and gas division was down due to lack of high-margin projects (like the Gorgon project) and losses from the engineering division; whilst the industrial trading division was impacted by writedown of inventories and impairment of certain receivables.

Outlook  For 2013, the company is looking to: 1) kick-start its Turkmenistan project, which has been delayed from 2012 on the back of late pipes delivery; 2) capitalise on projects from the North Malay Basin; and 3) the start-up of its pipe-coating plant in Louisiana (JV with Insituform).

 Its purchase of the 26.9% interest in Petra Energy could lead to collaboration in the manufacturing of boilers and/or marginal field works.

Change to Forecasts  Given that earnings were just slightly below our estimates and we expect earnings to be better going to 2013 with new contracts going to be dished out we are maintaining our FY13-14 net profit forecasts.

Rating  Maintain MARKET PERFORM

Valuation  Our unchanged target price of RM1.78 is based on a targeted PER of 12.5x, a discount to the average sector PER of 15.0x given the heightened uncertainty surrounding the stock from its inability to convincingly win contracts thus far. We would be inclined to remove the discount should there be stronger pipe-coating wins and a recovery in its engineering division.

Risks  1)Inability to secure more contracts going ahead;

2)Lower than expected margins.

Source: Kenanga