Weak margins dampen earnings for Wah Seong

by **Cals** Wed 27 Nov 2013, 11:14

Business & Markets 2013

Written by RHB Research

Wednesday, 27 November 2013 10:46

Wah Seong Corp Bhd
(Nov 26, RM1.69)
Downgrade to neutral (from buy) at RM1.72 with a revised fair value of RM1.56 (from RM2.50): Wah Seong’s nine months ended Sept 30 of 2013 financial year (9MFY13) core profit of RM22 million (-43% quarter-on-quarter, -58% year-on-year) made up 22% of our and 34% of consensus’ full-year estimates. This core profit included RM14 million in provisioning for doubtful debts at its industrial services division, and excludes a RM3.5 million negative goodwill from a subsidiary.

The poor results were attributed to: (i) lower margins; (ii) project delays; and (iii) increased general expenses from the plantation segment.

Earnings before interest, tax, depreciation and amortisation (Ebitda) margin dipped 3.5 percentage points (ppts) to 2.5% versus 9MFY12. By segment, we witnessed margin erosion in the oil and gas (O&G), industrial trading and services and other (mainly exploration and production [E&P] services) divisions. The renewable energy division continued to chalk up stable margins owing to demand from the oleochemical and palm oil industries.

The company attributed the weaker revenue from its O&G division to: (i) delays in its pipe coating projects, among which we believe is the RM611 million Statoil Polar-led development project in the Norwegian Sea; and (ii) change in product mix at its industrial trading and services division to “high-margin, low volume products”. This is despite the fact that its O&G segment’s order book remained at a healthy RM1.2 billion, or 72% of its total order book of RM1.7 billion.

We incorporate significantly lower project margins for its pipe coating business and industrial trading segment, slight margin erosion for its E&P division, and continued losses in the plantation segment. While we expect the Statoil and North Malay Basin projects to contribute positively by 4QFY13, we are conservatively assuming lower margins at the initial phases of these projects.

Accordingly, our 2013 to 2014 forecasts are slashed by 56% and 32% respectively. Our fair value is cut to RM1.56 (from RM2.50) based on a lower price-earnings ratio of 13 times (versus 14 times and close to -1 standard deviation of 12 times), to reflect higher project execution risks. — RHB Research, Nov 26

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This article first appeared in The Edge Financial Daily, on November 27, 2013.