News The company announced its Petra Energy ('PENERGY') acquisition shares were priced at RM1.68/share each with a cumulative cost of RM96.9m.
Completion of the acquisition is expected by 3QCY12.
Comments As mentioned previously in our report dated 14 June 2012, the acquisition itself is a totally new direction for WASEONG given that PENERGY is in the brownfield services industry (providing hook-up and commissioning and maintenance works).
In our view, the acquisition price, which is 6% above Petra Energy's reference price of RM1.58/share (based on FY11 net asset per share value of RM340.8m), is fair given the significant growth expected from Petra Energy (the consensus is looking at a turnaround for PENERGY in FY12).
The consideration of RM96.9m is also manageable as WASEONG's existing cash and cash equivalents stand at RM579.4m.
Near term earnings accretion from the stake would be minimal (we estimate associate contribution of c.RM6.4m based on FY12 consensus net profit of RM23.6m). However, we reckon the acquisition signals that the company is actively looking to diversify its service range in the more competitive pipe coating industry after main competitor BrederoShaw took over ailing Italian company, Socotherm.
In our view, this is also one of WASEONG's strategies to beef up its oil and gas division before demerging it from the other businesses. Recall that such a plan was previously proposed but was later scrapped when global conditions took a turn for the worse at that time.
Outlook Short-term project replenishments will be fuelled by domestic projects like the North Malay Basin (which we believe will see more newsflows in 2HFY12 given that Petronas has already signed contracts with Petronas Carigali and Hess Exploration) and also pipeline replacements due to Petronas' asset rejuvenation plans.
In the longer term, its pipe-coating plant in Louisiana (JV with Insituform) will enhance its reach in the Gulf of Mexico.
Forecast Maintaining our earnings estimates at this juncture until there is further information on the earnings accretion from Petra Energy.
Rating MAINTAIN OUTPERFORM
Valuation Our target price remains unchanged at RM2.23 based on a targeted 14.0x FY13 PER.
Risks Inability to secure more contracts going ahead.
Lower than expected margins