Wah Seong Corp Bhd
(Jan 8, RM1.25)
Maintain buy with an unchanged target price (TP) of RM1.50: A key target of Wah Seong Corp Bhd this year is to strengthen its order backlog and balance sheet. It can realistically double its backlog to RM2 billion on the back of its strong engineering and pipe-coating tender pipelines as well as comfortable de-gearing via disposal and monetisation of its non-core assets. Our TP pegs Wah Seong at an unchanged 10.7 times financial year ending Dec 31, 2021 price-earnings ratio which equates to its three-year mean valuation. The street has underestimated Wah Seong’s growth potential.

2020 would be the year for Wah Seong to ramp up its orders (RM969 million as at September 2019). Tender visibility is strong for both its engineering and pipe-coating operations. On the engineering side, it will leverage floating production storage and offloading project modules, fuelled by a boom in the segment. We expect Wah Seong to secure about US$200 million to US$300 million worth of orders for an 18-month work. Its pipe-coating works are also likely to flow in earnestly this financial year as tender prospects accelerate in Australasia, Europe and Americas. Putting things into perspective, we expect strong order visibility of RM2 billion to RM3 billion per annum for the group over the next two to three years.

As operations improve, Wah Seong also targets to strengthen its balance sheet along the way via disposal of non-core assets or investments. This includes its: i) 27% stake in Petra Energy Bhd (“not rated”) worth RM122 million; ii) 49% stake in Alam-PE Holdings (L) Inc (four offshore support vessels; zero debt); and iii) several properties worth over RM200 million in net book value — 24 acres (9.71ha) of agriculture land in Selangor (RM73 million), office buildings in Singapore (RM47 million), industrial land with offices in Penang (RM41 million) and commercial land in the Klang Valley (RM18 million). Assuming all these are executed, it would easily reduce Wah Seong’s net debt/gearing by half.

Wah Seong is a compelling oil and gas play with strong earnings growth prospects, coupled with undemanding valuations (sub-one times [x] book value; sub-3x net debt/earnings before interest, taxes, depreciation and amortisation). There is scope for a special dividend payment to shareholders should it get to monetise its non-core assets, with normalised yet minimal dividends as earnings and fundamentals improve. — Maybank IB Research, Jan 6