WZ Satu’s FY18 result was a negative surprise, reporting a net loss of RM84.2m. The operating loss for its oil and gas (O&G) division due to the RAPID project cost overruns was higher than expected. Net exceptional loss of RM2.1m increased core net loss to RM82.1m. We believe WZ faces challenging prospects for its construction and O&G divisions in view of the government’s review of infrastructure projects. We downgrade our call to SELL from Hold with a reduced TP of RM0.14, based on 20% discount to RNAV (30% discount previously).

Higher-than-expected Loss

WZ incurred a net loss of RM84.2m in FY18 compared to a net profit of RM25.3m in FY17. RM77.6m net loss was reported in 4QFY18 compared to RM7.3m in 3QFY18 and net profit of RM3.5m in 4QFY17. We were projecting a net loss of RM36.2m in FY18.

Cost Overruns

Revenue was down 10% yoy to RM501.8m in FY18 mainly due to lower O&G (-26% yoy) and trading (-47% yoy) revenue. Trading revenue declined due to the loss of revenue contribution from Weng Zheng Trading, which was sold in 2QFY18. Cost overruns for the West Coast Expressway Section 9 project led to a RM12.4m loss in FY18 for its construction division. Its Refinery and Petrochemical Integrated Development (RAPID) project also saw cost overruns leading to a RM50.2m loss in FY18. WZ is negotiating with its clients for amicable resolutions to disputes on the two projects.

Earnings Cut

We cut our core EPS forecasts by 39-45% in FY19-20E to reflect lower construction and O&G profit margins, slower order book replenishment and the enlarged share base. We reduce our RNAV/share to RM0.23 from RM0.43 to reflect higher net debt of RM75m as at 31 August 2018 and adjust for the completed bonus issue.

Downgrade to SELL

We downgrade our call to SELL from Hold with a reduced 12-month TP of RM0.14 from RM0.30, based on a 20% discount to RNAV. Current order book of RM873m should support a return to profitability in FY19E. Key upside risks are provision reversals and higher order book replenishment.

Exceptional items galore

Impairment of goodwill on acquisition amounted to RM25.1m while impairment of mining assets at its associates was RM14.4m in 4QFY18. However, the losses were partly offset by profit guarantees of RM29m from vendors of subsidiaries WZS Binaraya Sdn Bhd and WZS Misi Sdn Bhd in 4QFY18 and RM8.7m gain on sale of Weng Zeng Trading Sdn Bhd in 2QFY18.

Key Risks

The key upside risks are higher-than-expected new contract wins, lifting of the bauxite mining ban, higher-than-expected O&G earnings and order book replenishment.

Source: Affin Hwang Research - 31 Oct 2018