WZ Satu’s FY17 result came in below our expectation. Net profit increased by 11% yoy to RM25.3m, held back by lower associates that incurred a loss of RM1.6m in 4Q17 due to a complete export ban on bauxite mining. We cut our earnings forecasts by 13-34% in FY18-19E on slower new contract and lower associate earnings assumptions. WZ Satu is facing challenges in new contract bids due to stiff competition. We downgrade call to HOLD with target price of RM1.18, based on 10% discount to RNAV. Proposed 1-for-3 bonus issue will improve liquidity.

Below Expectation

Net profit of RM25.4m in FY17 was only 88% of our full-year forecast of RM28.9m. Revenue jumped 20% yoy to RM560.4m driven by higher revenue for construction (+9% yoy), O&G (+58% yoy), manufacturing (+5% yoy) and trading (+6% yoy) segments. EBIT jumped by 46% yoy to RM38.3m due to better profit margins from O&G (7.7%), manufacturing (13.1%) and construction (5.4%) segments. However, lower associate earnings and higher interest expense held back net profit growth (+11% yoy).

Associate Earnings Loss Due Bauxite Export Ban

Net profit plunged by 56% qoq and yoy to RM3.5m, mainly due to a share loss of RM1.6m in mining and other associate companies’ results in 4Q17 compared to a share profit of RM2.1m in 4Q16. WZ Satu’s bauxite mining operation was adversely affected by the moratorium on bauxite mining and a complete ban on exports by government authorities. Its mining segment’s prospect remains uncertain until the moratorium and export ban are lifted.

Downgrade to HOLD

Its large outstanding order book of about RM1.1bn will sustain earnings in FY18E. WZ is bidding for packages under ECER infrastructure and DUKE Phase 3 projects. Under Budget 2017, the government allocated only RM230m for the Central Spine Road project, which reduces the prospect that UEM-WZ will secure a RM4bn package for the project. We cut our new contract assumptions to RM400-450m from RM800-850m in FY18-19E. WZ’s current FY18E PER of 16x is fair, considering strong 2-year EPS CAGR of 28% in FY19-20E. Net dividend yield of 2.7% is also reasonable for a growth stock. We downgrade our call to HOLD from Buy with a reduced TP of RM1.18 from RM1.52, based 10% discount to our reduced RNAV.

Source: Affin Hwang Research - 30 Oct 2017