News

• Wah Seong has entered into Sales & Purchase agreement with Axis REIT (HOLD: TP: RM1.71) for disposal of 2 assets for a total of RM155m: (i) 86.5 acre land & building in Mukim Sungai Karang, Pahang for a consideration of RM120m; and (ii) 40.1 acre land (subdivided land) in the same area for RM35m.
• The existing usage of the assets consists of pipe coating and storage under the group’s subsidiary Wasco Coating Malaysia Sdn. Bhd.
• Upon disposal, Wah Seong will lease the assets from Axis REIT for 15 years starting from the completion date of asset disposal (6 months from now).
• Lease rental to be charged to Wah Seong would be circa RM1m/month in the first 3 years of leasing period before stepping up in every 3 years -to RM1.4m/month in the last 3 years. Financial Impact
• Overall the announcement of the disposal is neutral in our view.
• One-off gain from the disposal is expected to be at RM97.7m.
• Out of total RM155m proceeds, RM50m would be directed into working capital while the remaining RM105m to repay the group’s debt, bringing down its net gearing ratio from 1.2x to 0.9x.
• Both interest cost and depreciation charge savings from the disposal would amount to total of circa RM8m/annum.
• This would help to partially offset the extra leasing of the asset sold, resulting in net increase in expenses of RM4m/annum for Wah Seong, assuming initial agreed leasing rate of RM12m per annum.

Pros/Cons

• Its first pipe coating plant has commenced operations in Finland in 2Q17, servicing the Nord Stream 2 project (worth EUR 600m spanning 3 years).
• By 3Q17, 2nd plant in Germany would commence operations, further accelerating its revenue recognition for Nord Stream 2 contract.
• Announced disposal would partially ease group’s working capital requirement arose from Nord Stream 2 pipe coating project.

Risks

• Project execution risk.
• Pipe coating contract margin risk.

Forecasts

• Earnings forecast maintained.

Rating

HOLD (↔)

• Nord Stream 2 mega project is expected to be major contribution to group in the next 3 year. While orderbook has risen significantly, project execution risk remains as a concern as Nord Stream 2 project possesses high complexity and demanding logistical requirements.

Valuation

• TP is maintained at RM0.87 pegged to 10x FY18 PER.

Source: Hong Leong Investment Bank Research - 25 Jul 2017