WZ Satu’s 1QFY18 result was disappointing. Net profit plunged 94% yoy to RM0.5m in 1QFY18. The RM1.3m associate loss dragged down earnings in 1QFY18 (RM2.6m profit in 1QFY17) due to the ongoing bauxite mining ban in Pahang. Meanwhile, the construction and oil & gas (O&G) divisions reported lower EBIT (-52% yoy and -59% yoy respectively). We cut our EPS forecasts by 37-69% in FY18-20E and downgrade our call to SELL with a target price of RM0.76, based on 10% discount to reduced RNAV of RM0.84.

Plunge in Earnings

Core net profit of RM0.5m in 1QFY18 was only 4% of our previous full-year forecast of RM14m. Revenue was up 6% yoy to RM138.2m driven by higher revenue for O&G (+79% yoy) and manufacturing (+12% yoy) segments. However, EBIT fell by 48% yoy to RM5m due to lower profit margins for all divisions: construction (4.8%), O&G (1.3%) and manufacturing (14.4%). Higher depreciation (+29% yoy) and lower interest income (-31% yoy) contributed to the 86% yoy decline in PBT to RM1.4m.

Associate Earnings Loss Due Bauxite Export Ban

Associate loss of RM1.3m in 1QFY18 was due to its bauxite mining operation that was adversely affected by the ongoing moratorium on bauxite mining in Pahang since 15 January 2016 and a complete ban on exports by government authorities. The Pahang state government is spearheading a reform on approved permits for the exporting of bauxite to convince the Federal Government to lift the moratorium. Its mining segment’s prospect remains uncertain until the moratorium and export ban are lifted.

Downgrade to SELL

Its large outstanding order book of about RM936m will sustain its construction earnings for the next two years. However, new contract inflows have slowed in since 2017. We cut our new contract assumptions to RM150-300m from RM400-450m in FY18-20E. We also remove the RM10.9m potential one-off gain in FY18E from the proposed disposal of its bright steel manufacturing business given the uncertain on the timing of completion of the deal. WZ’s current FY18E PER of 28x is not attractive. We downgrade our call to SELL from Hold with a reduced TP of RM0.76 from RM1.18, based 10% discount to our reduced RNAV of RM0.84 (RM1.31 previously).

Source: Affin Hwang Research - 2 Feb 2018