Wah Seong Corporation

PP10551/09/2011(028936) 06 May 2011

MALAYSIA EQUITY Investment Research Daily 1QFY11 Result Preview Jason Yap +60 (3) 9207 7698 [email protected] Wah Seong Corporation

Expecting A Reasonable Quarter

BUY  Wah Seong is expected to announce its 1QFY11 results sometime in mid-May and we Fair Value RM2.60 expect a reasonable performance from the company. This is because this 1QFY11 Previous RM2.29 should record a full 3 months contribution from the Gorgon pipe coating job as well as better contribution from its engineering division. Besides that, we remain positive Price RM2.19 on its recently announced JV with Insituform as we see this giving Wah Seong the OIL & GAS opportunity to penetrate into the US, Brazil and Gulf of Mexico markets. We are now Wah Seong’s principal activities are in pipe upgrading our FY11-12 earnings as well as our call back to Buy from Neutral coating and corrosion protection, engineering and E&P services. previously. Hence, our target price has also gone up to RM2.60.

Stock Statistics A reasonable 1QFY11 is expected. Since Wah Seong’s operations have improved during Bloomberg Ticker WSC MK its 4QFY10 announcement with a net profit of RM24.8m, we are expecting a follow through Share Capital (m) 736.94 Market Cap (RMm) 1613.90 to its 1QFY11. Our basis include: i) 1QFY11 should record a full quarterly contribution from 52 week H│L Price (RM) 2.55 1.93 the Gorgon pipe coating project whereby the margin is higher than conventional coating 3mth Avg Vol (‘000) 1,288.0 YTD Returns 8.2 jobs; ii) its engineering division should contribute positively to the company after having Beta (x) 1.05 secured some new orders back in 2H10, and iii) all the necessary provision should have been made in FY10 since it was a ‘washout’ year for the company. Major Shareholders (%)

Wah Seong Trading Co 31.7 EPF 7.2 Positive outlook from JV with Insituform. Recently, Wah Seong had formed 2 JVs with KWAP 6.3 Insituform, who is an established pipeline rehabilitation group listed in the Nasdaq. Overall, we see these JVs positively as it would give Wah Seong the opportunity to penetrate into Share Performance (%) Month Absolute Relative the US, Brazil, and Gulf of Mexico markets by offering its deepwater pipe coating services. 1m 1.4 3.5 Also, we see this as the closest substitute opportunity for the company for not having 3m -2.3 -3.2 bought Socotherm, who was among the leading non-Asian pipe coaters, when it was up for 6m 5.0 2.6 12m -9.1 -22.3 sale in 2010. Nevertheless, we have not factored in the earning contribution from this JV as things are still preliminary and the contribution is only expected to come in after 2012. 6-month Share Price Performance

2.90 Minimal orderbook replenishment expected in the immediate term. We understand

2.70 that Wah Seong’s orderbook is about RM1.5bn and this figure is expected to reduce over

2.50 the next 3-6 months until it secures new jobs. However, we gathered from management

2.30 that they do not expect an immediate replenishment since the outcome of most of its

2.10 bidding would only be known starting 2H11. Some of these notable pipe coating projects

1.90 include: i) Australia Pacific LNG; ii) Gladstone LNG; iii) Wheatstone LNG, and iv)

1.70 Kebabangan. We believe the contract size for each of these projects would be near that of Oct-10 Nov-10 Dec-10 Jan-11 Mar-11 Apr-11 Gorgon at about USD163m, depending on the scope of work being awarded.

Upgrade to Buy. This is inline with our FY11-12 earnings upgrade by 8%-13% and also as we roll forward our valuation to FY12. Hence, our fair value is also higher at RM2.60 (previously RM2.29) based on existing PER of 16x FY12 EPS.

FYE Dec (RMm) FY08 FY09 FY10 FY11f FY12f Revenue 2343.2 1950.3 1523.4 1838.8 1927.5 Net Profit 115.6 121.3 56.0 106.7 113.4 % chg y-o-y 34.4 5.0 -53.9 90.6 6.3 Consensus - - - 107.5 129.0 EPS (sen) 17.6 18.5 8.5 16.2 17.3 DPS (sen) 6.0 7.5 4.5 9.0 9.0 Dividend yield (%) 2.7 3.4 2.1 4.1 4.1 ROE (%) 18.3 14.5 6.1 11.0 11.0 ROA (%) 6.3 5.6 2.7 5.3 5.6 PER (x) 12.4 11.9 25.7 13.5 12.7 BV/share (RM) 1.01 1.10 1.14 1.23 1.32 P/BV (x) 2.2 2.0 1.9 1.8 1.7 EV/ EBITDA (x) 8.5 5.9 11.1 6.9 6.4

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EARNINGS FORECAST

FYE Dec (RMm) FY08 FY09 FY10 FY11f FY12f

Turnover 2343.2 1950.3 1523.4 1838.8 1927.5 EBITDA 224.4 337.2 175.7 273.4 283.3 PBT 152.9 245.8 86.2 185.1 196.9 Net Profit 115.6 121.3 56.0 106.7 113.4 EPS (sen) 17.6 18.5 8.5 16.2 17.3 DPS (sen) 6.0 7.5 4.5 9.0 9.0

Margin EBITDA (%) 9.6 17.3 11.5 14.9 14.7 PBT (%) 6.5 12.6 5.7 10.1 10.2 Net Profit (%) 4.9 6.2 3.7 5.8 5.9

ROE (%) 18.3 14.5 6.1 11.0 11.0 ROA (%) 6.3 5.6 2.7 5.3 5.6

Balance Sheet Fixed Assets 853.1 893.7 793.8 676.6 659.9 Current Assets 1276.1 1313.2 1215.9 1347.5 1359.4 Total Assets 2129.2 2206.9 2009.7 2024.1 2019.3 Current Liabilities 811.5 671.8 500.8 453.0 370.6 Net Current Assets 464.6 641.4 715.1 894.5 988.8 LT Liabilities 364.3 500.5 458.3 457.6 465.6 Shareholders Funds 790.8 885.6 935.5 998.4 1068.1 Net Gearing (%) 62.2 31.6 28.0 17.3 9.3

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OSK Research Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated (NR): Stock is not within regular research coverage

All research is based on material compiled from data considered to be reliable at the time of writing. However, information and opinions expressed will be subject to change at short notice, and no part of this report is to be construed as an offer or solicitation of an offer to transact any securities or financial instruments whether referred to herein or otherwise. We do not accept any liability directly or indirectly that may arise from investment decision-making based on this report. The company, its directors, officers, employees and/or connected persons may periodically hold an interest and/or underwriting commitments in the securities mentioned.

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Chris Eng

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