WZ Satu reported a surprise RM7.3m loss in 3QFY18. Provisions for cost overruns in construction and oil and gas (O&G) projects, and further losses for its bauxite mining associates pushed WZ into the red. For 9MFY18, WZ incurred a RM6.6m net loss. WZ indicated that goodwill of RM41m could be impaired in 4QFY18 due to weaker construction and O&G prospects. We now expect a loss of RM36m for FY18E to reflect a full goodwill write off. Maintain our HOLD call with reduced TP of RM0.30, based on 30% discount to reduced RNAV.

Surprise Loss

WZ incurred a net loss of RM6.6m in 9MFY18 compared to a net profit of RM21.9m in 9MFY17. We were projecting a net profit of RM3.9m in FY18E previously. Revenue was down 6% yoy to RM385m in 9MFY18 mainly due to lower construction (-13% yoy) and trading (-36% yoy) revenue. Trading revenue declined due to the loss of revenue contribution from Weng Zheng Trading Sdn Bhd, which was sold in 2QFY18. However, the sale gave rise to an exceptional gain of RM8.7m.

Further Losses Expected in 4QYF18

WZ could incur further losses in 4QFY18 due to potential goodwill write-down for the construction and O&G divisions. WZ is facing challenges to replenish its order book as the East Coast Rail Link and Central Spine Road projects are stalled due to the ongoing government review of large-scale infrastructure projects. But, large remaining order book of RM963m will sustain its construction activities over the next 2-3 years.

Earnings Cut

We expect WZ to remain in the red 4QFY18 due to provisions for construction and O&G project cost overruns that are pending claims for variation orders. We expect a net loss of RM36m in FY18E assuming full write-down of goodwill. We also cut FY19-20E net profit by 18% to reflect lower construction and O&G profit margins.

Maintain SELL

We reiterate our SELL call with a reduced 12-month TP of RM0.30 from RM0.45, based on a 30% discount (10% discount previously) to our reduced RNAV/share of RM0.43 (RM0.50 previously).

Source: Affin Hwang Research - 20 Jul 2018