Wah Seong Corp Bhd
(Dec 1, RM1.51)
“Buy” with a target price (TP) of RM2.04: Wah Seong Corp recorded a strong nine-month of financial year 2014 (9MFY14) net profit of RM91 million (+678% year-on-year [y-o-y]) thanks to earnings improvement from its oil and gas (O&G) segment. Nonetheless, 9MFY14 earnings accounted for 90% and 83% respectively of our estimates and consensus full-year net profit forecasts which are essentially above both estimates expectation. No dividend was declared during the quarter.

The 9MFY14 revenue surged to RM1.7 billion (+34% y-o-y) underpinned by higher contribution from the O&G segment which jumped to RM952 million (+107% y-o-y) due to higher execution of pipe-coating projects for Statoil ASA’s Polarled project in Norway worth RM627 million, scheduled to be completed by May 2015. The group completed the pipe-coating contract for the North Malay Basin project, off Terengganu, at the end of the second quarter of 2014 (2Q14). However, renewable energy and industrial trading/service segment posted a weaker revenue in 9MFY14 at RM246 million (-2% y-o-y) and RM443 million (-6% y-o-y) respectively due to the slowdown in oleochemical industries which resulted in lower number of projects being executed during the period as well as lower margin achieved by its trading operation.

Wah Seong posted a pre-tax profit of RM142 million in 9MFY14 (+489% y-o-y) powered by the strong contribution from the O&G segment of RM124 million compared to a weaker 9MFY13 pre-tax profit of only RM1.7 million lifted by the higher progress recognition from Statoil’s pipe-coating projects. Overall, the group’s pre-tax profit margin in 9MFY14 was higher at 8% compared with 9MFY13 of 2%.

Wah Seong completed the share sale and purchase agreement in October 2014 to acquire 49% of  Alam-PE Holdings (L) Inc (Alam-PE)  for a cash consideration of RM106 million.

Alam-PE currently operates five vessels (two supply and support vessels, two accommodation vessels/workboats, one anchor handling tug supply vessel) with an average age of less than five years. Wah Seong’s order book currently stands at RM1.4 billion which could last the company until FY15. The order book of RM1.4 billion comprises: i) RM934 million (66%) for O&G segment; ii) RM300 million (21%) for renewable energy segment; and iii) RM180 million (13%) for industrial trading and services segment.

We expect Wah Seong to replenish its order book further over the next few years as the group is currently tendering about RM5.5 billion worth of projects with 65% (RM3.6 billion) belonging to the O&G division. We assume Wah Seong to grab at least RM1.7 billion worth of jobs based on a fair success rate factor of 30%.

We made adjustments to our earnings by upgrading our FY14 and FY15 earnings forecast by 19% and 14% respectively due to better-than-expected contribution from the O&G segment. FY14 and FY15 earnings are projected to increase by 278% and 6% y-o-y driven by: i) steady earnings contribution from pipe-coating jobs for the Statoil Polarled development; and ii) order book replenishment of RM1.7 billion.

We value Wah Seong at RM2.04 and the stock is a “buy”. Rerating catalyst may come from: i) stronger-than-expected order book replenishment; and ii) booming contributions from its 26.9%-owned Petra Energy Bhd and 49%-owned Alam-PE. — M&A Research, Dec 1

This article first appeared in The Edge Financial Daily, on December 2, 2014.