Highlights

Transforming with new major shareholder… In August 2013, Tengku Uzir Bin Tengku Abaidillah started to acquire stake in WZ Satu and emerged as a substantial shareholder. The emergence of Tengku Uzir has marked a turning point for the company with subsequent acquisitions to venture into the construction, mining and oil & gas industries. The company officially changed its name to WZ Satu Bhd in October 2013 to reflect the diversification from the ailing steel business.

Windfall from bauxite mining… In January 2014, SE Satu (49% owned by WZ Satu) entered into an exclusive mining contract to mine, extract and produce bauxite ore from eight hills measuring 66 hectares in Kuantan, Pahang for a period of 36 months with conservative reserve of 1.2m tonnes. We estimate this division to contribute 35-50% of FY14-FY16 earnings.

Maiden venture into O&G… In July 2014, WZ Satu proposed to acquire Misi Setia Oil & Gas Sdn Bhd for a purchase consideration of RM27m. It is mainly involved in the design, procurement, fabrication, installation and commissioning of skid packages, onshore oil and gas pipeline transmission system and plant terminal projects. Given Misa Setia’s experience in EPCC for onshore facilities and Metering System, we expect Misa Setia to get a slice from the RAPID project.

Growth from construction division … Majority of the key personnel (including the founders) had formerly worked with Road Builder, IJM or Gamuda. WZ Satu currently has an order book of RM309m, including the recently secured DUKE Phase 2 parcel (RM110m) to keep them busy until FY2016. WZ Satu has to date tendered for some RM1.9bn jobs, which we expect some of the wins will boost the current order book and grow the profitability of the construction division.

Strong earnings growth.. Net profit is expected to grow at CAGR of 67% from FY14 to FY16. Going forward, we see upside risks to our forecasts from (i) potential acquisition of new O&G business; (ii) upside to bauxite reserves; (iii) potential rationalizing of steel business and re-investment into O&G business with higher ROI; and (iv) stronger-thanexpected growth from civil engineering.

Catalysts

• Additional earnings contribution from new O&G acquisition.
• Potential upside to bauxite ore reserves.
• Potential rationalization of steel business and re-investment into O&G business with higher ROI.
• More contract wins from civil engineering division.

Risks

Fluctuation in the crude oil & bauxite ore price; Indonesia lifting mineral export ban; project execution ability; delay in contract awards.

Valuation

The company is trading at 15x FY15 P/E, slightly premium as compared to O&G peers at 12-14x. We believe the premium is justifiable after taking into account the strong earnings growth prospect with PAT expect to grow at CAGR of 67% from FY14 to FY16.

Source: Hong Leong Investment Bank Research - 18 Aug 2014