Wah Seong sees new major contracts in 2H

TheEdge Wed, May 15, 2019 11:06am - 4 years View Original


Wah Seong Corp Bhd
(May 14, 72 sen)
Maintain neutral with a lower target price (TP) of 78 sen:
Wah Seong Corp Bhd’s first quarter of financial year 2019 (1QFY19) earnings returned to the black at RM15.9 million. Its profit after tax and non-controlling interest (Patanci), however, was at RM20.2 million. Despite this, earnings remained weak by 30.9% year-on-year (y-o-y) mainly due to lower activities in its Malaysian operations, with 73% from the oil and gas (O&G) segment. Hence, its 1QFY19 earnings came in below our but above consensus full-year earnings estimates at 20% and 29% respectively.

The O&G segment’s revenue and earnings contracted 18.3% y-o-y and 25.6% respectively, largely attributable to continued lower activities especially in Asia Pacific. The revenue decrease resulted in a lower segment profit for the quarter compared with that in 1QFY18.

Its renewable energy (RE) segment’s revenue saw a 21.8% increase due to higher revenue from all businesses in the segment comprising equipment fabrication, boiler and steam turbine. Similarly, profit before tax surged 87% y-o-y mainly due to improved profit margins from the steam turbine business.

The industrial trading and services segment’s revenue declined 22.1% y-o-y, while earnings slumped 94.1% y-o-y mainly due to a weak market in the construction and infrastructure sectors resulting in lower sales of building materials and high-density polyethylene popes, construction and power generation equipment. The segment’s profit, however, saw contribution from a gain on the disposal of plant and machinery from the steel pipe manufacturing business’ closure in 2017.

The company’s current order book is at RM1.1 billion, unchanged from 4QFY18’s. Of the RM1.1 billion, 65% or RM702.4 million consists of O&G projects followed by RM330.2 million for RE and RM53.1 million for the industrial trading and services segment.

The current tender book, at RM6 billion, is unchanged from last quarter’s. The management guided it could get more new significant contracts in the second half (2H) of FY19. The company added that it had tendered for projects in Europe, Africa and Australia.

We are revising downwards our forecast FY19 earnings estimate by 21.7% to RM80.4 million, from RM102.7 million previously, to factor in weaker contribution from its O&G segment. We also reduced our FY20F earnings estimate by -10.6% to RM110.3 million, from RM123.4 million previously, as we remain wary about its order book replenishment progress.

After the earnings revision, we are maintaining our “neutral” stance on Wah Seong with a lower TP of 78 sen, from RM1 per share previously. Our TP is premised on a price-earnings ratio for 2019 of 7.5 times pegged to earnings per share for the year of 10.4 sen. Key downside risks include focusing on O&G jobs, delays in key local projects and its order book replenishment. — MIDF Research, May 14

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