WZ Satu incurred a 9MFY19 net loss of RM36.2m, which is 1.7x more compared to our FY19E loss forecast of RM21m. 3QFY19 loss narrowed to RM7.3m (-57% qoq) as its O&G division turned profitable while construction losses narrowed. Nevertheless, we believe net loss will sustain in 4QFY19 due to potential impairment on goodwill and receivables especially for the construction division. Maintain SELL.

9MFY19 Remains in the Red

WZ Satu recorded a wider net loss of RM36.2m in 9MFY19 compared to a net loss of RM6.6m in 9MFY18. It incurred EBIT loss of RM16m for its construction division due to losses sustained for its West Coast Expressway (WCE) section 9 & 10 subcontracts, RM12m loss for its trading & investment division and RM2.3m EBIT loss for its O&G division. Its revenue fell by 19% yoy to RM314m in 9MFY19, mainly due to lower O&G revenue (-55% yoy) as its key projects in Pengerang are at the tail end, as well as lower trading (-56% yoy) and manufacturing revenue (-11% yoy), which is partially offset by higher construction revenue (+11% yoy). Its bauxite mining associate companies contributed a lower net loss of RM1.5m in 9MFY19 compared to RM4.3m in 9MFY18.

Sequentially, Losses Narrowed. But, Likely Another Quarter of Losses

On a sequential basis, WZ Satu’s net loss narrowed to RM7.3m in 3QFY19 compared to RM17.1m in 2QFY19 as O&G division recorded EBIT of RM2.7m (vs. EBIT loss of RM2.7m in 2QFY19) and lower construction EBIT loss of RM3.2m (vs. EBIT loss of RM7.5m in 2QFY19). 3QFY19 revenue improved by 46% qoq as all segments except trading division improved. That said, for 4QFY19, we expect some contraction in construction revenue as the WCE project is expected to be completed in the quarter. Losses are expected to continue in 4QFY19 due to potential goodwill write-down and impairment especially for the construction cost overruns that are pending claims for variation order. Meanwhile, its bauxite mining activities has yet to resume pending government directive.

Maintain SELL

We cut our FY19-21E EPS forecasts by 10-100% accounting for the weaker-than-expected result. 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 Jul 2019