Wah Seong Corporation - New Contract Win

News    Last week, Wah Seong (“WASEONG”) announced that it had been awarded a contract valued at approximately USD198.0m (RM611.3m) by Statoil for coating works for the Polarled Development Project.The award also included coating works for the Kristin Project.

 The contract involves coating of approximately 520 km of pipes and is expected to commence in 3QCY13 and be completed in 2015.

Comments   Management guided that a portion of the pipes will be coated at its Kuantan plant, while some will be also coated in a plant that WASEONG is looking to mobilise in Norway. The capex spending for this plant is still uncertain.

 The project is also not as in deep water as the Gorgon project. Hence, assuming a PBT margin of 15% (which is similar to WASEONG’s blended oil and gas sector margin in 3QCY11) we estimate that the project will yield a PBT of c.RM91.7m for the lifetime of the project. 

 We are positive on the win as it is the first major contract won in a very long time (based on Bursa announcements, the last project win was the APLNG contract in Jul-11). However, given that the contract falls within our contract replenishment assumption  of around RM600m for pipe coating, the win is neutral to our earnings forecasts. 

Outlook   The release of its 4QFY12 quarterly financial result is expected on 26 Feb, which we expect to likely be within our expectations. In perspective, 2012 has been a significantly slow year for WASEONG.

 For 2013, the company is looking to: 1) kick-start its Turkemenistan 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 startup 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.

Forecast   Unchanged at this juncture.

Rating  Maintain MARKET PERFORM

Valuation    Our unchanged target price of RM1.78 is based on a targeted PER of 12.5x, which is at 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. However, we would be inclined to remove the discount should there be stronger pipe-coating wins and a recovery in itsengineering division. 

Risks   Inability to secure more contracts going ahead and lower than expected margins.

Source: Kenanga