WZ Satu’s 1QFY19 result was disappointing. It incurred further net loss of RM11.8m in 1QFY19, dragged down by its construction and oil and gas (O&G) divisions. We revise our forecast to a net loss of RM2.7m in FY19E, compared to RM10.6m net profit previously, assuming the company returns to profitability in 2HFY19. We reiterate our SELL call with TP of RM0.14, based on 20% discount to RNAV.

Losses to Continue

Revenue declined 13% qoq and 27% yoy to RM102m in 1QFY19, mainly due to lower O&G revenue as its key projects in Pengerang are at the tail end. WZ incurred a loss before tax of RM11.7m, mainly contributed by its construction (RM7.5m loss) and O&G (RM3.1m loss) businesses. Its bauxite mining associate companies contributed a lower net loss of RM0.1m in 1QFY19 compared to RM1.3m in 1QFY18. Substantial impairment was recognised in 4QFY19 as the bauxite mining ban has been extended to 31 March 2019.

Cost Overruns

Its construction division continued to incur losses due to the high cost to complete the RM499m West Coast Expressway (WCE) Section 9 subcontract. Its subcontract for the Refinery and Petrochemical Integrated Development (RAPID) project is also incurring further losses. WZ has submitted variation order (VO) claims to the main contractor IJM Corporation for the WCE project. But, it is uncertain if the VO claims will be approved by IJM. WZ is also going into arbitration with main contractor Petrofac to resolve the cost overruns for the RAPID project.

Earnings Cut

We now assume a net loss of RM2.7m in FY19E, compared to net profit of RM10.6m previously; reflecting further losses for its construction and O&G divisions. We also cut our earnings forecasts by 50-72% in FY20-21E.

Maintain SELL

Current order book of RM731m should support a return to profitability in FY20E, although PE valuations remain expensive at 57x FY20E EPS. We reiterate our SELL call with an unchanged 12-month TP of RM0.14, based on a 20% discount to RNAV. The recent rebound in share price from its 5- year lows (RM0.175 as at 11 December 2018) is possibly on speculation of political links to the newly crowned Agong from Pahang. WZ’s major shareholder Tengku Uzir is a cousin of the Agong. Key upside risks are provision reversals and higher order book replenishment.

Source: Affin Hwang Research - 30 Jan 2019