News  Yesterday, Wah Seong Corporation (WASEONG) announced that it has completed the share sale and purchase agreement to acquire 49% of Alam-PE (JV of Alam Maritim (ALAM; OP; TP: RM1.45) for a cash consideration of RM106m from outgoing CIMB-PE.

Comments  In our 25-June report we had basically opined that this purchase was a positive investment route as: (i) the pricing was at a decent estimated CY14 PER of 6.3x (assuming stagnant PAT of RM16.8m in CY14) and (ii) it will introduce recurring income for WASEONG which typically sees lumpy earnings (a function of the contractual nature of WASEONG’s business).

 We understand WASEONG will leave the management of the fleet to a subsidiary of ALAM which is another plus point.

Outlook  WASEONG will be buying into a fleet that includes two accommodation vessels. Given the tight supply of such vessels (a majority of such vessels are commissioned); we see no issues for such vessels securing contracts. These vessels are also relatively new (4-5 years); hence age profile will not be an issue.

 Current earnings drivers for WASEONG are an order book which is largely dominated by pipe-coating contracts at RM1.5b (from RM1.7b in Mar-14) and PENERGY’s contribution which is expected to increase once work commences on the Pan Malaysia hook-up and commissioning contract and the RSCs start to contribute (first oil purportedly reached). Tender book is guided to be RM4b with almost all being oil and gas projects.  Other catalysts will be the successful takeoff of the joint-venture pipe-coating plant in Louisiana (JV with Insituform).

Forecast  Given that the acquisition is completed, we are increasing our FY14-15E forecasts by 3.3% and 10.6% to RM99.7m and RM132m (from RM96.6m and RM119.4m, respectively).

 We assume ALAM-PE can continue to make RM34.4m in FY14 and FY15 and WASEONG sharing 49% of that.

Rating MAINTAIN OUTPERFORM

Valuation  At an unchanged PER of 13x and upgraded EPS of 17.2 sen (versus 15.5 sen previously), our new TP is RM2.23 (from RM2.02)

 Our target PER is at a discount of c.7% to other mid-cap vessel peers that we ascribed 14x PER as WASEONG is just an investor in other oil and gas services at this juncture.

Risks to Our Call (i) Securing less contracts and (ii) lower-than-expected margins.

Source: Kenanga