Newsbreak

Wah Seong (WSC) announced that it wholly-owned subsidiary, PMT Industries Sdn Bhd (PMT) has entered into a JV with Shinko Ind. Ltd. (SHINKO) to manufacture turbines and any other related ancillary equipment, parts and spares. SHINKO will hold 51% and WSC the balance.

The JV commenced on 22 Apr 2013.

The paid up capital of the company will be RM1m.

Comment

We view the JV award positively and in line with our view that WSC earnings will accelerate in FY13 and beyond.

WSC is currently partnering with SHINKO to distribute turbine and related machinery under the renewables division.

We understand that this JV will add an additional product that is manufactured in house. The product will use SHINKO’s proprietary technology.

The renewables division made up 16% and 42% of FY12’s revenue and profit respectively. Renewables also makes up 16% of WSC’s RM1.5bn orderbook. We expect contribution from the Renewables division to fall to 11% of PBT in FY13 as the contribution form the O&G business rises, after a lacklustre FY12.

Although we expect the Renewables division to continue to contribute strongly, a stronger catalyst will come from winning higher margin pipe coating jobs in Turkmenistan, the North Malay Basin and the Gulf of Mexico.

Risks

• Political risk, Congo Oil Palm Plantation .
• Execution risk.

Forecasts

• Maintained.

Rating

BUY

• Positives –
  • Infrastructure growth related to new fields.
  • GoM facility and strong acquisition record.
• Negatives –
  • Acquisition fuelled growth - volatile in downturns.
  • Delays in contract disbursement.

Valuation

Maintain our BUY call and TP of RM2.13 based on unchanged 13x FY14 EPS of 16.4 sen/share.

We use a 13x multiple, compared to our average O&G multiple 14x for small cap stocks because we expect only 63% of PBT to come from O&G related business.

Source: Hong Leong Investment Bank Research - 23 Apr 2013