PP 7767/09/2010(025354)

1 June 2010

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

R e su l ts N o t e
1 June 2010
MARKET DATELINE

Wah Seong Corp Share Price

Fair Value
:
:
RM2.21
RM2.57
1Q Earnings Dragged Down By Lower Contribution Recom : Market Perform
(Downgraded)
From Engineering Division

Table 1 : Investment Statistics (WASEONG; Code: 5142) Bloomberg: WSC MK

Net
Core net Basic FD FD EPS FD
FYE Turnover profit EPS# EPS# Growth PER C.EPS* P/NTA P/CF Gearing GDY
Dec (RMm) (RMm) (sen) (sen) (%) (x) (sen) (x) (x) (x) (%)
2009 1,950.3 121.3 17.1 13.1 29.4 16.9 - 3.5 19.9 0.4 3.3
2010f 2,374.4 149.6 21.1 16.1 23.1 13.8 19.0 2.8 4.8 0.5 2.9
2011f 2,642.0 170.8 24.1 18.3 14.0 12.1 21.0 2.2 4.9 0.5 3.3
2012f 2,396.2 168.7 23.8 18.1 (1.2) 12.2 21.0 1.9 10.6 0.5 3.2
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC # Excl EI * Consensus Based On IBES Estimates

♦ 1QFY12/10 results below expectations. Wah Seong’s 1QFY12/10 core

RHBRI Vs.
Above
Consensus

net profit of RM17m was below our expectation and consensus estimates,
In Line
accounting for 10% and 9% of our full-year forecast and market consensus. Below
The variance was largely due to weaker-than-expected contribution from its
engineering division given still-weak demand for topsides fabrications and Issued Capital (m shares) 709.2
compressors stemming from the softer market for FPSOs as oil majors Market Cap(RMm) 1,567.4
Daily Trading Vol (m shs) 0.5
continue to hold back huge investments in marine assets.
52wk Price Range (RM) 1.69-2.83
♦ Lower EBIT margin. On a blended basis, EBIT margin declined 6.3%-pts to Major Shareholders: (%)

11.3% given lower utilisation rates for its fabrication yards as well as higher WST Trading Co 22.7
contribution of lower-margin industrial pipes. Nevertheless, 1QFY12/10 net Tan Kim Yeow Sdn Bhd 5.4
LTAT 5.0
profit on yoy basis was partially lifted by lower minorities interest arising from
the acquisition of 32.5% Socotherm’s stake in PPSCIH. FYE Dec FY10 FY11 FY12
FD EPS chg (%) (15.7) (11.0) (4.5)
♦ Orderbook visibility remains bright. Wah Seong’s orderbook now stands Var to Cons (%) (15.5) (12.8) (13.9)
at around RM1.2bn (vs. RM1.4bn previously). Of the current orders, 57% is
from pipe coating, 14% from engineering division and the balance from pipe PE Band Chart

manufacturing (10%), trading (9%), renewable energy (8%) and E&P

services (2%). Wah Seong is currently tendering for another RM5.3bn worth PER = 20x
of orders of which 60% would come from pipe-coating jobs, and the balance PER = 15x
PER = 10x
from pipe manufacturing division (25%) and engineering business (14%).

♦ Risk. 1) Potential delay in E&P spending on the back of slower-than-expected

economic recovery; and 2) Cancellation of projects, which appears minimal as
pipe-coating is a downstream activity.
Relative Performance To FBM KLCI
♦ Forecasts. We have revised down our FY10-12 revenue contributions from
engineering division by 21%, 17% and 6.3% respectively after factoring Wah Seong
lower-than-expected demand for topside fabrication and compressors. We
have also trimmed our FY10-12 PBT margin assumptions to 25.5%, 26.0%
and 27.5% respectively (from 29%, 28.5% and 28% previously) for the
engineering division. All in, we have cut our FY10-12 earnings projection by FBM KLCI

15.7%, 11.0% and 4.5% respectively after factoring in the above changes.

♦ Investment case. Accordingly, we have trimmed our fair value to

RM2.57/share (vs. RM3.09/share previously), which is based on 16x FY10
PER. With M&A deals now pushed out after failing to take over Socotherm’s Wong Chin Wai
(603) 92802158
assets, and potential for more earnings disappointment in the 2QFY10, we
wong.chin.wai@rhb.com.my
are downgrading our call on the stock to Market Perform from Outperform.
Yap Huey Chiang
Please read important disclosures at the end of this report. (603) 92802171
yap.huey.chiang@rhb.com.my

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Table 2. Wah Seong Quarterly Review

QoQ YoY
FYE Dec (RMm) 1Q09 4Q09 1Q10 Comments
(%) (%)
Pipe Coating 94.6 90.6 99.3 10 5
Higher qoq and yoy due to stronger contribution from higher-margin
SSGP project as well as shallow water Gumusut Kakap contract.
Pipe Manufacturing 93.4 117.4 125.5 7 34
Stronger qoq and yoy due to stronger contribution from lower-margin
industrial pipes.
Engineering 86.7 58.4 51.8 (11) (40)
Lower qoq & yoy due to lower contribution from GSI.
Division
Renewable Energy 48.8 61.1 33.9 (45) (30)

Trading 84.9 101.5 122.6 21 44

49.8 26.1 24.6 (6) (51)
Lower qoq and yoy due to lower contribution from agro-based
E&P Services engineering.
Others 5.9 - 0.3 n.m (96)
Inter segment (27.4) - (48.2) n.m 76
elimination
436.6 455.1 409.7 (10) (6)
Turnover Lower yoy as growth in pipe coating, trading services and pipe
manufacturing divisions being dragged down by weaker contribution
from GSI and agro-based engineering.

65.7 80.0 46.4 (42) (29)

EBIT
15.1 17.6 11.3 (36) (25)
EBIT margin (%)
(11.4) (10.7) (6.6) (38) (42)
Int expense
0.7 0.8 (1.3) (257) (285)
Associates

Pipe Coating 21.9 45.9 25.3 (45) 15

1QFY12/10 pre-tax margin for oil and gas declined to 25.5% from
50.7% in 4QFY12/09 due to lower utilisation rates
14.7 29.9 12.4 (59) (16)
1QFY12/10 declined to 9.9% from 25.5% in 4QFY12/09 due to higher
Pipe Manufacturing contribution from lower-margin industrial pipes.
9.0 (9.7) (0.4) (96) (104)
1QFY12/10 utilisation rates for Singapore, Shah Alam and China

Engineering yards remain low at 50% (vs. 75% in 1QFY12/09 and 55% in
Division 4QFY12/09)
Renewable Energy 7.4 11.8 3.5 (71) (53)

Trading 1.5 3.0 3.7 22 139

.
E&P Services 4.0 (0.6) 1.5 (353) (62)
.
Others (3.5) (10.2) (7.4) (27) 111
55.0 70.1 38.5 (45) (30)
Pre-tax profit
(6.4) (20.0) (8.3) (58) 30
Taxation Lower than statutory tax rate due to tax exemption for certain
subsidiaries.
11.6 28.5 21.6 (24) 86
Effective tax rate
(22.9) (15.3) (13.1) (14) (43)
Minorities Lower due to reduction in minority interest post acquisition of 32.5%
Socotherm’s stake in PPSCIH
25.7 34.8 17.0 (51) (34)
Net profit
25.7 34.8 17.0 (51) (34)
Core net profit
Source: Company, RHBRI

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Table 3. Earnings Forecasts Table 4. Forecast Assumptions

FYE Dec (RMm) FY09 FY10F FY11F FY12F FYE Dec FY10F FY11F FY12F
Revenue 1,950.3 2,374.4 2,642.0 2,396.2 Pre-tax margin (%):
Pipe-coating 16.1 15.9 15.1
EBITDA 280.1 350.4 403.0 374.9 Engineering 25.5 26.0 27.5
Margin (%) 14.4 14.8 15.3 15.6

Depreciation (25.0) (27.5) (30.3) (33.3)

Interest expense (10.7) (26.7) (33.2) (40.5)
Associates 1.4 5.0 5.0 5.0
Exceptionals - - - -
Source: Company data, RHBRI estimates
Oil and gas 233.1 279.0 320.7 280.6
Industrial services 37.0 32.2 33.8 35.5
Others (24.3) (10.0) (10.0) (10.0)
Pre-tax profit 245.8 301.2 344.5 306.0
Tax (39.5) (75.3) (86.1) (76.5)
Minorities (84.9) (76.2) (87.6) (60.8)
Net profit 121.3 149.6 170.8 168.7
Core net profit 121.3 149.6 170.8 168.7

Source: Company data, RHBRI estimates

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
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be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
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The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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