We view Wah Seong’s proposed acquisition of a  49% stake in Alam-PE as a strong sign that it is expanding its O&G value chain, aside from its indirect exposure to RSCs via associate Petra Energy. The deal  seals a partnership  with  Alam  Maritim  at  a  cheap  cost,  ie  via  co-owning  five young  vessels.  There  may  be  synergistic  opportunities  and  margin expansion ahead. Maintain BUY, with a MYR2.25 FV (15x FY15F P/E).

• Cheap  entry  into  OSV  industry.  Wah  Seong  inked  a  deal  to  acquire 49% of Alam-PE (from CIMB PE SB), which owns five marine  vessels, for  a  purchase  consideration  of  MYR106m .  We  believe  this  signals  a lower-risk  entry  into  the  offshore  support  vessel  (OSV)  segment. According to the company’s  announcement  yesterday, this  translates to an implied P/E of 6.3x on Alam-PE’s FY13 earnings of MYR16.8m – well below the 20-26x  FY13 P/Es  the O&G stocks in our universe  trade at. Alam Maritim (AMRB MK, NEUTRAL, FV: MYR1.66) owns the remaining51% stake.  
• Young  fleet.  Alam-PE has a  fleet of five Malaysian-flagged vessels, ie an  anchor handling  tug  and  supply  (AHTS)  vessel, two  straight supply vessels and two accommodation/maintenance workboats (see Figure 1). The average age of the vessels is 5.5 years, based on  our calculation  –younger than the average ages of the AHTS and platform supply vessels(PSVs)  in  the  region.  While  the  vessels  are  low-end  and  replenishing charter  contracts  is  a  risk,  we  understand  some  charters  are  already long-term (3-5 years) and the demand for OSVs is high.
• Synergistic  opportunities.  While  determined  to  diversify  into  stable, recurring revenue streams, Wah Seong also has exposure to brownfield and  risk-service  contracts  (RSCs)  via  27%-owned  associate  Petra Energy (PENB MK, NEUTRAL, FV: MYR2.71). With its global  presence, we  see  synergistic  opportunities  with  related  parties  and  expanding margins, as the  vessels enjoy  tax benefits  for OSVs  (being registered in Labuan).  The group’s M&A angle in O&G is not new  –  but we believe it has learned hard lessons from past M&As and is expanding cautiously.
• Maintain  BUY  and  MYR2.25  FV  at  an  unchanged  15x  FY15F  P/E,  in line  with  sector  valuations,  premised  on  an  earnings  turnaround.  We retain our forecasts at this juncture, pending management’s guidance on earnings and funding structure. The deal could be completed as early as 4Q14,  and  full contributions  from  it  could raise  our  FY15F  earnings  by 8% and our FV to MYR2.40-2.50.

We  believe  the  deal  may  lead  to  a  blended  PAT  margin  expansion  in  the  group’s existing  O&G  business,  based  on  the  margins  of  pure-play  and  non-pure  OSV companies,  as  highlighted in Figures 4 and 5.  The high margins of OSV players that are  registered  in  Labuan  are  partly  attributed  to  significantly  low  tax  rates.  Wah Seong’s engineering and trading division records thin margins, and its pipe-coating business has margins in the mid- to high teens when its orderbook is healthy.

Source: RHB