We are positive on the new JV agreement with LESSO in the long run underpinned by its strong supply chain network in China. However, we maintain our FY17E earnings estimates in view of minimal initial contribution from the new JV company. All in, we keep the OUTPERFORM call on the stock with unchanged TP of RM0.96 pegged to 10.0x FY17 PER.

Entered new JV agreement. Yesterday, WASEONG announced that its indirect wholly-owned subsidiary, Syn Tai Hung Trading Sdn Bhd (STHT) has entered into a Joint Venture and Shareholders’ Agreement with Lesso Home Service Holdings Limited (LESSO) to incorporate a new JV company to provide sale and distribution of building materials, architectural products and home furnishing goods. STHT shall subscribe to a 49% stake in the newly formed JV company with the remaining stake to be held by LESSO.

Collaboration with China’s big player. We are positive on this JV as it helps to expand its existing industrial trading & services division. LESSO is an indirect wholly-owned subsidiary of China Lesso Group Holdings Limited, a China home building materials player listed in Hong Kong with revenue base of >RMB15.3b in 2015. By capitalizing on the extensive supply chain network of LESSO in China, it will help to facilitate trading segment in the next few years in view of growing Chinese investment in Malaysia.

No changes to our earnings forecast. We believe the initial contribution from the proposed JV could be insignificant in the near term. However, we believe the JV is positive in the long run riding on the growing bilateral trade between China and Malaysia.

Reiterate OUTPERFORM. Despite WASEONG still in the midst of securing its financing, the EUR600m Nord Stream 2 contract, in our view, remains a strong re-rating catalyst. Hence, we maintain our OUTPERFORM call with an unchanged TP of RM0.96 pegging earnings to 10.0x CY17 PER, slightly higher than our small-mid oil and gas sector’s valuation of 7-9x due to its ability to secure contracts amidst industry downturn. Our TP also has an implied CY17 PBV of 0.6x which is in line with the average oil and gas sector’s valuation (excluding Petronas-related stocks) and also consistent with its -1.0SD to its 5-year average Fwd. PBV.

Risks to our call include: (i) weaker-than-expected project execution, (ii) smaller-than-expected contract size, and (iii) lower-than-expected margins.

Source: Kenanga Research - 04 Jan 2017