Initiation: Preferred Partner

WZ Satu (WZS) is an established subcontractor and partner of choice for Ekovest, IJM Corp and UEM Builders. Its bauxite mining operation was adversely affected by the mining ban imposed by the government but it is still able to export its stockpile. We expect core EPS growth of 70% yoy in FY17, driven by rising earnings from construction and oil & gas services, and stable mining associate earnings in FY17. We initiate coverage on WZS with a BUY call and target price of RM1.52.

Core Expertise in Construction

WZS’s core operation is the provision of civil engineering and construction, onshore oil and gas (O&G) services and bright steel manufacturing. Management team has extensive experience in the industry and some were senior managers/directors in Road Builder (merged with IJM Corp) and PATI Sdn Bhd (construction arm of UEM Builders) previously. WZS also manufactures steel components for the O&G and airline industries. Its two associate companies (30-49% stake) are involved in bauxite mining.

Growing Order Book

We expect the expansion of its construction and O&G order book to drive a three-year EPS CAGR of 35% in FY16-19. Its order book increased to RM885m at end-FY16 compared to RM768m at end-FY15. Its current order book is RM1.23bn, equivalent to 3.3x FY16 construction and O&G revenue. WZS targeted RM1.2bn orderbook by end-FY17. The game changer for WZS is the potential clinching of the RM4bn Central Spine Road project with its partner UEM Group to expand its order book and move up the value chain to be a main contractor.

Sustainable Bauxite Earnings

WZS benefited from the bauxite mining boom in Pahang, which led to its share of associate PAT peaking at RM18.5m (82% of group PAT) in FY15. The ban on bauxite mining since early-2016 led to associate PAT declining 49% yoy to RM9.4m (42% of group PAT) in FY16. WZS has approval to export its stockpile and this should support mining earnings in FY17.

Initiate Coverage With BUY Call

We initiate coverage on WZS with a BUY call and TP of RM1.52, on a 10% discount to RNAV. WZS’s current CY18E PER of 13x looks attractive relative to the construction weighted-average PER of 18x. Net dividend yield of 2.5% looks reasonable, supported by its net cash position.

Source: Affin Hwang Research - 25 May 2017