Large Provisions Expected

We believe earnings prospects for WZ Satu will remain challenging due to cost overruns for its construction division, mainly for its West Coast Expressway (WCE) subcontract. We expect WZ Satu to see record-high losses due to provisions for construction cost overruns in FY19E. Earnings prospects remain challenging in 1HFY20 due to slow construction progress billings and depleting Oil & Gas (O&G) order book. We reiterate our SELL call on WZ Satu with a 12-month target price of RM0.14, based on 20% discount to RNAV.

Cost Overruns

The delay in completion of the WCE Section 9 and 10 subcontract works and additional cost incurred led to a RM15.8m loss for its construction division in 9MFY19. We gather that the subcontract works should complete by end-2019 and the company will likely make substantial provisions for cost overruns, given the uncertainties on the approval of variation order (VO) claims against the main contractor IJM Corporation Bhd.

New Contract Bids

WZ Satu is bidding for interstate water pipe-laying projects in the east coast of Peninsular Malaysia, civil work packages for East Coast Rail Link and the Bintulu Additional Gas Sales project (expansion of onshore gas processing plant). Its current order book of over RM700m will sustain its activities over the next two years, comprising works for the SUKE expressway, Gemas-Johor Bahru Electrified Double Tracking, PR1MA houses in Kuantan.

Potential Water Distribution and New Mining Ventures

WZ Satu is exploring opportunities in water distribution concessions, a diversification from its current O&G pipe-spooling business to laying water pipes for an interstate water transfer project. Its associates involved in bauxite mining has not resumed mining works due to weak demand and stringent new requirements imposed by the authorities. It is exploring opportunities in mining other minerals to redeploy its mining equipment.

Maintain SELL

WZ Satu is expected to remain in the red for the second-year running in FY19E and earnings prospects remain challenging in 1HFY20 due to slow order book replenishment and billings. Maintain our SELL call. Key upside risks are approval of VO claims and higher order book replenishment

Source: Affin Hwang Research - 30 Oct 2019