Larger Losses

WZ Satu posted higher net loss of RM94m in FY19 compared to RM90m in FY18, mainly due to cost overruns for its construction division. Revenue plunged 24% yoy to RM389m, mainly due to disputed claims for the West Coast Expressway (WCE) project variation works leading to nonrecognition of revenue. Its Oil & Gas (O&G) division and bauxite mining associates also registered losses. Due to lack of resources, we cease coverage on WZ Satu. Our last recommendation was SELL with target price (TP) of RM0.14, based on 20% discount to RNAV.

Further Losses in 4QFY19

Net loss of RM94m in FY19 was higher than our forecast of RM43m. WZ Satu recorded a larger loss of RM58m in 4QFY19 compared to RM7m in 3QFY18. We understand that the company made full provisions for WCE project losses due to uncertainties on its variation claims against the main contractor IJM Corporation. Its O&G division returned to the black in 2HFY19, reporting EBIT of RM4.8m. But the profit was insufficient to offset the RM5.1m loss incurred in 1HFY19. The bauxite mining operation contributed to the share of associates’ net loss of RM3.6m in FY19.

Challenging Prospects

WZSatu’s remaining order book of RM756m will sustain its activities in FY20. However, the uncertainty on the commencement date of a project may affect the result in FY20. Its bauxite mining operation has not resumed operations due to weak demand for bauxite and stringent requirements imposed by the authorities. WZ is exploring other mining opportunities. We believe earnings prospects remain weak in 1HFY19 given the challenging environment faced by its various operations.

Cease Coverage

We cease coverage on WZ Satu. Our last call on the stock was SELL with 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 - 31 Oct 2019