Wah Seong’s
1QFY12 results were below expectations. The poorer-than-expected results were
due to the recognition of lower margin products and services, especially in the
O&G segment. In FY11, the company had the benefits of higher margins from
its Gorgon pipe coating job as well as higher contribution from its equipment
division. We are downgrading our FY12-13 earnings by 12%-14% and at the same
time downgrading our call from Buy to Neutral, with a lower fair value of
RM2.06 (previously RM2.40).
Below expectation. The 1QFY12 results were below consensus and our estimates,
making up 13% and 15% of consensus and our FY12 forecasts respectively. The
poorer-than-expected results were mainly due to the recognition of lower margin
products and services, especially in the O&G segment. In FY11, the company
had recognized higher margin from its Gorgon pipe coating job as well as higher
contribution from its equipment division. As a result, its 1QFY12 revenue and
net profit came in at RM481.6m and RM17.8m, down 6.3% and 8.9% q-o-q
respectively, although YTD revenue was slightly lower by 1.9% while its net
profit fell by a larger by 59.0% YTD.
Downgrading FY12-13 earnings forecasts by
12%-14%. Our downgrade factors in
the lower-than-expected 1QFY12 results and potentially slower quarterly profit
growth going forward.
Downgrade to Neutral from Buy. Our
fair value for the company has also been downgraded to RM2.06 (previously
RM2.40), based on the existing PER of 13x FY12 EPS following our earnings
downgrade. Although we understand that Wah Seong maintained its pipe coating
market leadership in Asia, which may be less affected by the European economic
crisis, we believe that the possibility of spillover negative effects from that
region would eventually lead to slower new contract awards. Hence, 2012 may
still remain a tough year for Wah Seong as well as its peers.
Source: OSK
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