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

- Wah Seong has secured a RM232mil pipe-coating contract from Petronas Carigali S/B to provide anticorrosion coating, internal flow coating and concrete weight coating for 250km of pipes in the EVA-NMB Gas Delivery System (ENGDS) project, expected to commence in 4Q2013 and to be completed by 2Q2014.

- The ENGDS is located within the North Malay Basin, a new integrated gas development project in Peninsular Malaysia, which encompasses the development and commercialisation of nine stranded gas fields together with the development of a new gas gathering, processing and transportation hub.

- The contract is slightly lower than our earlier expectation of RM300mil for this job, as indicated in our past report. As mentioned earlier, we think that the group’s sole competitor Bredero Shaw may have also secured a small portion of the North Malay Basin job.

- The work scope is a part of the construction of a slightly longer 300km pipeline and a new onshore slug catcher. This includes an acid gas removal system using membrane technology which is co-owned by PETRONAS, the first of its kind to be used onshore.

- We expect gross margin for the fast-tracked ENGDS contract to reach around 25%. Together with the highmargin US$198mil (RM611mil) Statoil pipe-coating contract, which was awarded earlier in February this year, these new contracts should provide adequate acceleration in earnings to achieve FY13F expectations. Recall that 1HFY13 results accounted for only 12% of our FY13F earnings.

- Hence, we maintain Wah Seong’s FY13F-FY15F earnings for now as the contract falls within our annual order book replenishment of RM2bil-RM2.2bil. We estimate that the group’s order book to have risen by 13% from RM1.5bil to RM1.7bil currently. As this order book represents only 0.8x our FY14F revenue, the group still needs a significant pickup in order replenishment to meet FY14F market expectations.

- The group is currently bidding for a potential RM4bilRM5bil worth of tenders, including the Malikai deepwater pipe-coating job. But the stock currently trades at a fair FY14F diluted PE of 13x vs. the sector’s 16x as losses from the group’s non-synergistic 470,000ha oil palm plantation investment in the Republic of Congo could continue to cap interest.

Source: AmeSecurities