- We maintain our HOLD recommendation for Wah Seong Corporation, with an unchanged sum-of-parts-based fair value of RM1.57/share, which implies a rolled-forward FY13F PE of 14x – a 15% discount to the oil & gas sector’s 17x.

- Wah Seong has entered into a joint-venture agreement with Japan’s Shinko Ind Ltd to set up a relatively small company with a paid-up capital of RM1mil to market and manufacture turbines and other related ancillary equipment.

- Wah Seong will have a 49% stake in PMT Shinko Turbine S/B, while Shinko, one of the more globally renowned brands for steam turbines and pumps, will own the remaining 51% stake. The turbines (See Picture 1) are widely accepted in the palm oil industries, power plants, paper mills, sugar factories, fertiliser factories, petrochemical industries, and marine industries.

- Since 1956, Shinko has designed and manufactured over 10,000 sets of steam turbines. We understand that Wah Seong plans to manufacture the turbines and pumps at the group’s Shah Alam factory.

- But these equipment are meant for the agro-based and renewable energy industries, not for the more exciting oil & gas sector. Hence, this development is unlikely to have a significant impact on our FY13F-FY15F net profits.

- The group’s order book of RM1.5bil currently (See Chart 1) represents only 0.7x our FY13F revenue. Hence, the group will need to reaccelerate its order replenishment to meet market expectations.

- We understand that the group is currently bidding for more tenders, around RM4bil with some domestic projects such as the North Malay basin likely to be awarded soon. But the recent US$198mil Polarled contract will only begin to contribute to the group’s earnings by 3QFY13 while any fresh high-margin contracts may only be awarded in the next few months. As such, there is a likelihood that lowmargin pipe-coating jobs will continue to depress Wah Seong’s 1HFY13 results.

- A silver lining would be stronger newsflow from Petra Energy’s participation in the small-field risk-sharing contract with Coastal Energy for the Kapal, Banang and Meranti fields. But this is offset by the absence of significant synergies between Petra Energy and Wah Seong’s operations at this stage.

- The stock currently trades at a fair FY13F diluted PE of 15x vs. the sector’s 17x. Uncertainties over the group’s 470,000ha oil palm plantation investment in the Republic of Congo could continue to cap interest in the near term.

Source: AmeSecurities