- We maintain our HOLD recommendation for Wah Seong Corporation, with a lower sum-of-parts-based fair value of RM1.90/share (from an earlier RM2.16/share), which implies a lower rolled-forward FY14F PE of 14x (from an earlier 16x) – a 15% discount to the oil & gas sector.

- We have cut FY13F earnings by 25% due to a 2%-point cut in EBIT margin estimate for the group’s oil & gas segment, given the disappointing 1HFY13 net profit of RM9mil – 9% of our and street estimates.

- But we only slightly tweaked FY15F-FY16F earnings on expectations of a stronger rebound in earnings with the commencement of its high-margin US$198mil (RM611mil) Statoil pipe-coating contract, which was awarded earlier in February this year as well as the imminent North Malay basin contract.

- Recall that the Statoil contract, which will commence revenue contribution in September this year, involves anticorrosion coating, internal flow coating and concrete weight coating for 520km of pipes in the Polarled Development Project, with completion in 2015.

- We understand that the fast-tracked North Malay basin pipe-coating job, valued up to RM300mil, could be announced soon. But the final value offered to Wah Seong is uncertain as the group’s sole competitor, Bredero Shaw, may also secure some portions of the tender. Wah Seong is also competing with Bredero Shaw for the high-margin Malikai deepwater pipe-coating job as well.

- Wah Seong turned around to a net profit of RM9mil in 2QFY13, from an earlier loss of RM2mil in 1QFY13 largely from higher margin jobs for Turkmenistan, Exxon and Shell as its earlier low-margin project for APLNG were completed in the previous quarter. Higher contributions from the group’s renewable energy segment partly offset the 2QFY13 loss of RM5mil from the Congo plantation development.

- The group’s order book was flat QoQ at RM1.5bil currently (See Chart 4), in which 39% of new orders came from the industrial trading & services, 33% from oil & gas and 28% from renewable energy segments. As this order book represents only 0.7x our FY13F revenue, the group needs a significant pickup in order replenishment to meet FY14F market expectations.

- While the group is currently bidding for potentially RM5bil worth of tenders, which stem largely from overseas jobs, we note that Wah Seong’s earnings visibility is more opaque compared to other domestic O&G players. The stock currently trades at a fair FY14F diluted PE of 13x vs. the sector’s 16x as losses from the group’s nonsynergistic 470,000ha oil palm plantation investment in the Republic of Congo could continue to cap interest.

Source: AmeSecurities