Wah Seong Corporation - Secures first major European contract HOLD

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

- We maintain FY12F-FY14F net profits as the award of the Polarled contract is within our new order assumption of RM2bil-RM2.2bil for FY13F-FY14F.

- Last Friday, Wah Seong announced that the group has secured a US$198mil (RM611mil) contract from Statoil for pipe-coating services involving anti-corrosion coating, internal flow coating and concrete weight coating for the Polarled Development Project (previously called Norwegian Sea Gas Infrastructure) and the Kristin Project.

- The contract, which involves coating of 520km of pipes, will be recognised over 30 months commencing in 3Q2013 to 2015. The pipeline, which connects Aasta Hansteen to Nyhamna in Møre og Romsdal county, facilitates the development of Aasta Hansteen and other fields in the Norwegian Sea.

- This is a positive development for Wah Seong, with the securing of its first major pipe-coating job in Europe. But we caution against over-enthusiasm as such a major award tends to be lumpy and may not be repeated in subsequent quarters given Wah Seong’s past track record.

- While the Polarled project is located in deepwater, our channel checks reveal that Wah Seong’s scope of work does not involve deepwater insulation services. Hence, we understand that pre-tax margins could be in the region of 20%, below the 25%-30% which was expected for the earlier Gorgon project in Australia.

- Assuming that the group had managed to secure other smaller contracts in 4QFY12 sufficient for its quarterly depletion, we estimate that Wah Seong’s order book has risen by 60% from RM1bil to RM1.6bil. We understand that the group’s current tender book is over RM4bil, of which a larger portion stems from overseas, where the chances of securing fresh awards are more difficult to assess.

- Wah Seong’s results, expected to be released on 26 February, are likely to come within street’s expectations. We understand that the Congo plantation project has already started selling some logs in December last year but any contribution is expected to be minimal.

- 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