Wah Seong's 1QFY12 results were below expectations. The poorer-than-expected results were due to the recognition of lower margin products and services, especially in the O&G segment. In FY11, the company had the benefits of higher margins from its Gorgon pipe coating job as well as higher contribution from its equipment division. We are downgrading our FY12-13 earnings by 12%-14% and at the same time downgrading our call from Buy to Neutral, with a lower fair value of RM2.06 (previously RM2.40).
Below expectation. The 1QFY12 results were below consensus and our estimates, making up 13% and 15% of consensus and our FY12 forecasts respectively. The poorer-than-expected results were mainly due to the recognition of lower margin products and services, especially in the O&G segment. In FY11, the company had recognized higher margin from its Gorgon pipe coating job as well as higher contribution from its equipment division. As a result, its 1QFY12 revenue and net profit came in at RM481.6m and RM17.8m, down 6.3% and 8.9% q-o-q respectively, although YTD revenue was slightly lower by 1.9% while its net profit fell by a larger by 59.0% YTD.
Downgrading FY12-13 earnings forecasts by 12%-14%. Our downgrade factors in the lower-than-expected 1QFY12 results and potentially slower quarterly profit growth going forward.
Downgrade to Neutral from Buy. Our fair value for the company has also been downgraded to RM2.06 (previously RM2.40), based on the existing PER of 13x FY12 EPS following our earnings downgrade. Although we understand that Wah Seong maintained its pipe coating market leadership in Asia, which may be less affected by the European economic crisis, we believe that the possibility of spillover negative effects from that region would eventually lead to slower new contract awards. Hence, 2012 may still remain a tough year for Wah Seong as well as its peers.