WZ Satu’s 1HFY19 result was disappointing. The group incurred a larger net loss of RM17.1m in 2QFY19 compared to RM11.8m in 1QFY19. We increase our net loss forecasts to RM21m in FY19E and assume a further loss of RM13.7m in FY20E (previous net profit estimate was RM3.8m). We believe its legacy loss-making projects for construction and oil and gas (O&G) divisions will continue to hold back a return to profitability until FY21E. We reiterate our SELL call with unchanged TP of RM0.14, based on 20% discount to RNAV.

Still in the Red

1HFY19 revenue fell 28% yoy to RM187.6m, mainly due to lower O&G revenue as its key projects in Pengerang are at the tail end and lower trading revenue following the disposal of a subsidiary last year. WZ incurred a loss before tax of RM28.8m in 1HFY19 compared to a net profit of RM0.7m in 1HFY18. It incurred EBIT losses of RM12.5m for construction division and RM5.1m for O&G division. Its bauxite mining associate companies contributed a lower net loss of RM1.1m in 1HFY19 compared to RM3.4m in 1HFY18. Net loss of RM17.1m in 2QFY19 is the fourth quarterly loss since 3QFY18.

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.

Maintain SELL

Current order book of RM839m will support the group’s construction and O&G activities in FY19-20. But, the legacy loss-making projects are expected to delay a turnaround to FY21E. The lifting of the bauxite ban effective from 1 April 2019 will allow its bauxite mining activities to resume when the standard operating procedures are met. We reiterate our SELL call with an unchanged 12-month TP of RM0.14, based on a 20% discount to RNAV. Key upside risks are approval of VO claims and higher order book replenishment.

Source: Affin Hwang Research - 25 Apr 2019