- We downgrade our call on Wah Seong Corporation from HOLD to SELL, with a lower fair value of RM1.48/share (from an earlier RM1.90/share), based on a FY14F PE of 15x – a 10% discount to the oil & gas (O&G) sector’s 17x.

- We have halved FY13F earnings and cut FY14F-FY15F by 27%-30% by lowering our order book assumption by 5%- 8% on lack of order book visibility, lower margins for the oil & gas division and expected continuing losses for the plantation division in Congo.

- Wah Seong’s 9MFY13 net profit of RM12mil (-75% YoY) came in way below expectations, accounting for only 19% of our earlier FY13 forecast and 18% of street’s RM64mil. The weak 9MFY13 results stemmed from a 3%-point EBIT contraction to 3% largely due to the oil & gas segment which has not accounted for any contributions from the Statoil and North Malay Basin pipe-coating jobs. Also, there was a RM13mil loss from the Congo oil palm estate, RM8mil in doubtful debt provisions from the industrial trading and services (ITS) segment and high effective tax rate of 69% (vs. 22% in 9MFY12).

- Sequentially, the group’s 3QFY13 net profit fell by 52% to RM4mil due to provision for doubtful debts and higher effective tax rate of 67%. The higher effective tax rates stemmed from non-tax deductible provisions.

- We expect the group’s 4QFY13 earnings to rebound as the US$198mil (RM611mil) Statoil pipe-coating contract, which was awarded earlier in February this year, and the RM232mil North Malay basin job, commenced contributions in October this year. But this is still unlikely to attain our earlier forecast and general consensus.

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

- As the group secured RM232mil North Malay basin pipecoating contract in September, its order book rose by 13% QoQ to RM1.7bil currently (See Chart 4), of which 71% is derived from O&G, 18% from renewable energy and 11% from ITS. This accounts for 0.85x of FY14F revenue.

- The group is currently bidding for potential RM4bil-RM5bil worth of tenders, including the Malikai deepwater pipe coating job. But the larger portion of its tenders is not in Malaysia. Hence, Wah Seong’s earnings visibility is more opaque compared to other domestic O&G players.

- The stock currently trades at a pricey FY14F diluted PE of 18x vs. the sector’s 17x while 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