WAH SEONG : BUY at RM2.37, with lower TP of RM2.71

Wah Seong Corp could face challenging times

Wah Seong Corporation Bhd
(Aug 18, 2.36)
Maintain buy at RM2.37 with lower target price of RM2.71 (from RM2.85): The oil and gas (O&G) business contributes 60% to 70% to Wah Seong’s total revenue while the balance is from industrial services. Out of its entire O&G business, the engineering division contributes 30% to 40% of total revenue, with the balance mainly from the pipe coating business. We gather that the engineering jobs which were supposed to come in by 1H2010 are still delayed given the protracted slowdown in global O&G activities. Hence, we are not expecting any performance boost from this division to Wah Seong’s 2QFY2010 and 3QFY2010 performance for the time being.

Fortunately, Wah Seong has secured the pipe coating job for the entire Gorgon project valued at about US$162.9 million (RM514.76 million), which should keep its Kuantan plant busy until early 2012. We understand that the bulk of the revenue and profit will be recognised in 2011 and that the job involves conventional and concrete coating. Although margins are not as attractive as those for the Gemusut deepwater pipe coating job executed last year, we believe the gross margin is still good at 20% to 30%.

Given that Wah Seong’s volume and business outlook remained unchanged as at 1QFY2010, we expect to see flat quarterly results quarter-on-quarter. Hence, we are downgrading our FY2010/11 earnings by 5% to 28%.

Failure to clinch Socotherm deal a blessing in disguise? In our view, it now appears to be a blessing for the company in the short term since new drilling activities in the US and Europe have slowed down following the BP oil spill. However, on the negative side, this would make it difficult for Wah Seong to penetrate the US and Europe markets in the future, and Bredero Shaw would be a tough rival to compete with, given its combined size with Socotherm.

We maintain our “buy” call with a lowered target price of RM2.71 (previously RM2.85) based on the existing PER of 14 times following our FY2011 earnings downgrade. Wah Seong is still the market leader in the provision of pipe coating and corrosion protection in Asia. — OSK Investment Research, Aug 18


This article appeared in The Edge Financial Daily, August 19, 2010.