Wah Seong Corp -All is Well Despite Tough Year

From our recent meeting with Wah Seong’s management, we learnt that management will focus on expanding its business locally in view of the positive outlook for the local oil and gas (O&G) sector next year. The company recently acquired a stake in Petra Energy as it intends to leverage on the latter’s network to secure more local jobs. Given the optimism for the O&G sector in 2013, we maintain our BUY recommendation, with an unchanged RM2.33 FV.

Comfortable with Petra Energy stake for time being. Management said that it is happy with the recent acquisition of a 26.9% stake in Petra Energy, being a friendly party in the deal. With the focus on expanding its domestic business this year, the group hopes to leverage on Petra Energy’s strong network to secure more local jobs moving forward.

Minimal job replenishments in immediate term. The group’s orderbook, now worth about RM1.1bn, is expected to dwindle over the next nine to 12 months. We understand that management is currently bidding for a few projects, the notable being: i) Turkmenistan (phase 2) worth USD55m-USD60m, ii) North Malay Basin, for which the value is yet to be finalised at this juncture, and iii) Australia (value undisclosed). These projects would contribute positively to group earnings for FY13/14 should the company succeed in its bids.

Outlook for Aegion JV still positive. Wah Seong has struck a joint-venture (JV) with Aegion (previously Insituform), which we understand will be led by Aegion in the logistic and marketing aspects while Wah Seong will be in charge of technology transfer. We view the JV positively as it would give Wah Seong the opportunity to penetrate into the deepwater pipe coating markets in the US, Brazil, and Gulf of Mexico. Nevertheless, we have not factored in the earnings contribution from this JV as we expect the contribution to flow in only from 2013.

Higher dividend unlikely. Presently, Wah Seong’s dividend payout ratio is set at 30% of net earnings but the company has been paying an average 40% of total earnings. We are retaining our dividend forecast at 6.5 sen for FY12 as management has indicated that there is unlikely to be any dividend upside this year.

Maintain BUY. We are retaining our BUY recommendation for Wah Seong, with an unchanged FV of RM2.33, based on the existing PE of 13x FY13 EPS. The stock offers a potential upside of 33.1% to our fair value.

Source: OSK