News

Yesterday, WASEONG announced that its whollyowned subsidiary, Wasco Energy Ltd has entered into a Shareholders Agreement with Welspun Corp Ltd (Welspun) to establish a new joint venture company.

The JV aims to combine their capabilities and expertise in commencing and carrying out concrete weight coating of pipes business in India.

WASEONG shall subscribe to a 49% stake in the newly formed JV company with the remaining stake to be held by Weslpun.

Comments

Welspun is one of the world’s largest steel pipes makers with manufacturing facilities in India, USA and Saudi Arabia.

We believe this JV will enable WASEONG to expand further its footprint in India while Welspun can leverage on its experiences in concrete weight coating business. The Indian market accounted for 5.7% of its total revenue in 2014.

The new JV company will then set up a concrete weight coating plant at Anjar, Gujarat which is estimated to cost INR 2.0b (c. RM127.5m).

WASEONG’s capex is expected to increase by RM62.5m spanning 2015 and 2016. Its gearing would be hiked up to 0.8x from 0.7x assuming full debt financing.

As of now, we reckon there won’t be any job contract win by the JV in the near-term amid the uncertain crude oil price environment.

Outlook

As at 1Q15, its orderbook stood at RM1.2b, of which close to 60% is from the oil and gas sector with the balance from renewable energy and industry trading divisions.

Going forward, pipe coating business will continue to be its main earning driver. Tender book is guided to be RM5.0b with almost all being Oil and Gas related projects (>90.0%).

Further re-rating may arise as the company is eyeing to bag the second project worth up to USD100m in Norway with Statoil, which also involves handling Polarled pipes.

Nonetheless, we reckon it may not materialise in the near-term as most oil majors are tightening their capex budget. Hence, it is yet to be factored into our forecasts.

Forecast

We maintain our forecasts for now pending 2Q15 results announcement end of this month

Rating

Maintain MARKET PERFORM

Valuation

Our Target Price is maintained at RM1.35, pegged to unchanged CY16E PER of 9.0x, which is consistent with small-mid caps’ valuations (7-10x) in an industry down-cycle.

Risks to Our Call

(i) Securing lesser contracts than expected and (ii) lower-than-expected margins.

Source: Kenanga Research - 26 Aug 2015