Thursday 28 Mar 2024
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This article first appeared in The Edge Financial Daily on November 17, 2017

Wah Seong Corp Bhd
(Nov 16, RM1.07)
Initiate coverage with  buy and a target price (TP) of RM1.35:
Our TP of RM1.35 is based on 12 times fully diluted financial year 2018 (FY18) earnings per share (EPS), which is the sector’s weighted average price-earnings for small-cap players. After two years in the doldrums amid the  collapse in crude oil prices and a dwindling order book, earnings are poised to rebound from FY17. The turnaround was set in motion following the award of a €600 million (RM3 billion) pipe-coating job for the Nord Stream 2 (NS2) project. On the back of a total order book of RM3.5 billion, we forecast an earnings per share (EPS) compound annual growth rate (CAGR) of 22% for the FY17 to FY19 period. With more stable crude oil prices, demand for pipe-coating and engineering services for the oil and gas sector should improve going forward as we pencil in a modest annual replenishment assumption of RM200 million. In addition to an improved earnings outlook, Wah Seong is also looking to pare down its over-leveraged balance sheet (1.07 times net gearing as of June 30) by disposing of non-core assets, including its loss-making 49%-owned plantation in Congo.

Earnings recognition of the NS2 project will accelerate from the second half of FY17 onwards as coating activities have progressed to double shifts during the period. The progressive earnings delivery and consensus earnings (below our estimates) upgrades will act as share price catalysts.

Amid the oil price recovery and eventual return of upstream activities, a stronger than expected order book replenishment will further rerate Wah Seong. Furthermore, progress in its non-core assets divestment exercise will also be a boost.

Wah Seong has carried out a massive kitchen-sinking exercise in FY16. However, it still carries considerable assets in its books, particularly its loss-making 49%-owned palm oil plantation assets in Congo worth about US$5 million (RM21 million). Further deterioration and/or delay in divestment will lead to further impairment. — AllianceDBS research, Nov 15

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