• Transformation bears fruits. Since emerging as a substantial shareholder in Oct 2013, Dato Sri Tengku Uzir bin Tengku Dato Ubaidillah (DSTU) officially changed the company name from WZ Steel Bhd to WZ Satu Bhd in to reflect the diversification from its legacy steel business into the civil engineering & construction (C&C) works (for highways, bridges, ports, etc), bauxite mining (via associate companies) and oil & gas (O&G) segments (design, procurement, fabrication, installation and commissioning of skid packages, onshore oil and gas pipeline transmission system and plant terminal projects). Meanwhile, the group is also moving up the value chain in manufacturing aircraft components and gradually exit from its legacy steel business.

• In 1HFY17 results review. Against 1HFY16, WZSATU recorded a 24% yoy hike in revenue to RM268m, mainly driven by the increase in C&C and O&G divisions. Despite a 43% yoy plunge in bauxite contribution due to the government ban, PBT still expanded at a robust rate of 70% yoy on the back of strong turnaround in O&G and manufacturing divisions coupled with its steady performance from C&C segment.

• Q-Q, revenue gained 6% but PBT slipped 33%, principally owing to the exceptional adverse weather condition that affected the C&C and mining segments. Overall, the C&C division was the biggest contributor with ~41% to 6MFY17 PBT, followed by oil & gas (~23%), bauxite division (23%) and manufacturing & others (~13%).

• Growing order book. The transformation has strongly turnaround the company from a mere RM1.2m PATAMI in FY11 to RM22.9m in FY16. In its 1HFY17 results review, WZSATU is cautiously optimistic of the group outlook, premised on its FY16 RM931m orderbook (comprising of mainly infrastructure-related projects) against RM768m in FY15. To strengthen its orderbook, WZSATU is actively bidding for works on the RM3.7bn Setiawangsa-Pantai Expressway and RM4bn Central Spine Road (CSR) projects. In the long term, WZSATU could be one of the beneficiaries of the new 600 km East Coast Rail Link (ECRL) given its established track record, being one of the subcontractors for the RM12.5bn Ipoh-Padang Besar Double Tracking Rail project.

• Expanding into PR1MA. In Feb17, WZSATU proposed to acquire a PR1MA housing project’s construction company (to be completed by 3Q17 via issuance of 29.41m shares @ RM1.02), which involved in a RM503m mixed development comprising 2,426 PR1MA homes and 69 retail units. The project is expected to commence by the seco nd quarter of this year, with a construction period of 36 months. The proposed acquisition represents an initiative to expand its order book by securing a PR1MA development project, which if completed, will increase its order book to about RM1.4bn, which should be able to keep it busy for the next three years.

• Bauxite mining ban is a temporary setback. Government extends the bauxite mining ban again until mid-2017 to clear remaining stockpiles of the aluminium raw material as it presses the industry to halt damage to the environment. The ban is likely to prolong further and could affect WZSATU’s share of associate profit in the short to medium term, as the Government highlighted that a 2.15m tonnes of bauxite still remained around Kuantan port after sliding 60% from a 5.4m tonnes before the moratorium was first imposed in Jan 2015.

• To recap, WZSATU benefited from the bauxite mining boom in Pahang, which saw its associate profit rallied from RM4.5m in FY14 to a peak of RM18.5m in FY15 before tumbling again to RM4m in 1HFY17. Despite near term hiccup, management considers this as a temporary setback and the mining segment contribution will eventually improve and be recurrent in future.

• Accumulation by major shareholder. To recap, DSTU has been upping its stake consistently in the open market, holding a 27.6% as at 17 Apr against ~18% a year ago, signaling his confidence of the group. Meanwhile, Lembaga Tabung Haji is also holding a 9.2% stake lately.

• Pending a positive flag breakout. After falling 11.6% from 52-wek high of RM1.38 (17 Mar) to a low of RM1.22 (14 & 18 Apr), WZSATU’s share prices staged a 5 sen rebound to close at RM1.27 yesterday in high volume of 562k against 1-month average daily volume of 236k and 3- month average daily volume of 378k shares, respectively.

• At the moment, share price is forming a “Flag” pattern, which augurs well for further advance in the short term. A decisive breakout above RM1.31 (50-d SMA) will spur prices higher towards RM1.38 and our long term target at RM1.49 (Flagpole measurement objective). On the flip side, failure to hold at supports level of RM1.22 and RM1.20 psychological levels may indicate weakness in the share price towards RM1.12 (200-d SMA) and hence, a cut-loss signal at RM1.18

Source: Hong Leong Investment Bank Research - 21 Apr 2017