WZ Satu Bhd
(Oct 30, 26.5 sen)
Maintain sell with an unchanged target price (TP) of 14 sen: We believe earnings prospects for WZ Satu Bhd will remain challenging due to cost overruns for its construction division, mainly for its West Coast Expressway (WCE) subcontract. We expect the company to see record-high losses due to provisions for construction cost overruns in financial year 2019 (FY19) earnings. Earnings prospects remain challenging for the first half of FY20 (1HFY20) due to slow construction progress billings and its depleting oil and gas (O&G) order book. Our TP of 14 sen is based on a 20% discount to revalued net asset value.
The delay in the completion of the WCE Section 9 and 10 subcontract works and additional costs incurred led to a RM15.8 million loss for its construction division for the cumulative nine months of FY19. We gather that the subcontract works should be completed by end-2019 and the company will likely make substantial provisions for cost overruns, given the uncertainties over the approval of variation order (VO) claims against the main contractor, IJM Corp Bhd.
WZ Satu is bidding for interstate water pipe-laying projects in the east coast of Peninsular Malaysia, civil work packages for the East Coast Rail Link and the Bintulu Additional Gas Sales project (expansion of an onshore gas processing plant). Its current order book of over RM700 million will sustain its activities over the next two years, comprising works for the Sungai Besi-Ulu Kelang Elevated Expressway, Gemas-Johor Baru electrified double tracking, and 1Malaysia People’s Housing in Kuantan, Pahang.
The company is exploring opportunities in water distribution concessions, a diversification from its current O&G pipe-spooling business to laying water pipes for an interstate water transfer project. Its associate involved in bauxite mining has not resumed mining works due to weak demand and stringent new requirements imposed by the authorities. It is exploring opportunities in mining other minerals to redeploy its mining equipment.
WZ Satu is expected to remain in the red for the second year running in FY19, as earnings prospects remain challenging for 1HFY20 due to slow order book replenishment and billings. Key upside risks include approval of VO claims and higher order book replenishment. — Affin Hwang Capital, Oct 30