WZ Satu’s return to profitability likely to be delayed by project losses

This article first appeared in The Edge Financial Daily, on April 26, 2019.
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WZ Satu Bhd
(April 25, 25.5 sen)
Maintaing sell with an unchanged target price (TP) of 14 sen.
WZ Satu’s first half of the financial year 2019 (1HFY19) result was disappointing. The group incurred a larger net loss of RM17.1 million in second half of the financial year 2019 (2HFY19) compared to RM11.8 million in 1HFY19. We increase our net loss forecasts to RM21 million in earnings for the FY19E and assume a further loss of RM13.7 million in FY20E (previous net profit estimate was RM3.8 million). We believe its legacy loss-making projects for construction and oil and gas (O&G) divisions will continue to hold back a return to profitability until FY21E. We reiterate our “sell” call with an unchanged TP of 14 sen, based on 20% discount to revalued net asset value (RNAV).

1HFY19 revenue fell 28% year- on-year (y-o-y) to RM187.6 milllion, mainly due to lower oil and gas (O&G) revenue as its key projects in Pengerang are at the tail end and lower trading revenue following the disposal of a subsidiary last year. WZ incurred a loss before tax of RM28.8 million in 1HFY19 compared to a net profit of RM700,000 in 1HFY18. It incurred earnings before intetests and taxes (Ebit) losses of RM12.5 million for its construction division and RM5.1 million for O&G division. Its bauxite mining associate companies contributed a lower net loss of RM1.1 million in 1HFY19 compared to RM3.4 million in 1HFY18. Net loss of RM17.1 million in 2QFY19 is the fourth quarterly loss since 3QFY18.

Its construction division continued to incur losses due to the high cost to complete the RM499 million West Coast Expressway (WCE) Section 9 subcontract. Its subcontract for the Refinery and Petrochemical Integrated Development (Rapid) project is also incurring further losses. WZ has submitted variation order (VO) claims to the main contractor IJM Corp for the WCE project. But, it is uncertain if the VO claims will be approved by IJM. — AffinHwang Capital Research, April 25