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PP 7767/09/2010(025354)

Malaysia Corporate Highlights .


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

Com pany Upda te


13 August 2010
MARKET DATELINE

Wah Seong Corp Share Price


Fair Value
:
:
RM2.35
RM2.04
Looking To FY11 For Better Numbers Recom : Underperform
(Downgraded)

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


Net Basic FD FD EPS FD Net
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 18.1 - 3.7 21.2 0.4 3.1
2010f 1,926.1 121.7 17.2 13.1 0.3 18.0 17.9 3.1 11.2 0.5 2.2
2011f 2,285.3 145.9 20.6 15.7 19.7 15.1 20.2 2.5 5.5 0.5 2.6
2012f 2,333.8 157.0 22.1 16.8 7.5 14.0 22.2 2.1 7.4 0.5 2.8
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

♦ Weak results in store. Softer numbers are expected in the upcoming


Issued Capital (m shares) 709.2
2QFY10 results (expected to be on 25 August) as the engineering division Market Cap (RMm) 1,666.7
continues to suffer sluggish project replenishment while the pipe-coating Daily Trading Vol (m shs) 1.0
and pipe-manufacturing divisions were relatively inactive, pending the 52wk Price Range (RM) 1.954-2.83
start-up of the Gorgon project in June 2010. Major Shareholders: (%)
Wah Seong Trading Co 29.06
♦ Meaningful earnings recovery only in FY11. Although the 2H10 S/B
outlook appears to be more upbeat compared to 1H10, a more EPF 10.18
meaningful recovery is only expected in FY11, premised on the full-year Midvest Asia S/B 5.80
contribution of the Gorgon project and an expected improvement of the KWAP 5.45
overall oil and gas industry dynamics. Tan Kim Yeow S/B 5.29

♦ Australia plans still intact. Management remains positive on Australia FYE Dec FY10 FY11 FY12
and expects pipeline projects like the Queensland Santos Gladstone LNG FD EPS chg (%) (18.5) (14.4) (6.9)
(435km), Curtis LNG (575km) and Surat Gladstone LNG (515km) to be Var to Cons (%) (26.9) (22.4) (24.1)

awarded by 2011. Despite the inherent uncertainties with regards to


PE Band Chart
awards timelines and impact from the proposed 40% Petroleum Resource
Rent Tax (PRRT) for the onshore coal seam gas producers, Wah Seong PER = 20x
remains our most direct play for the LNG projects planned. PER = 15x
PER = 10x
♦ Keeping M&A plans. Wah Seong reiterated they are still actively looking
for M&A opportunities. Given the Socotherm buy would have expanded
the company’s reach to Brazil, Middle East and the Gulf of Mexico, we
expect those markets to remain part of its long-term expansion plans.
♦ Risks. 1) Prolonged delay in E&P spending beyond FY11; 2) Slower-than-
Relative Performance To FBM KLCI
expected economic recovery; and 3) Cancellation of pipeline projects .

(especially those in Australia).


♦ Forecasts. We trim our FY10-12 net profit estimates by 18.5%, 14.4% Wah Seong
and 6.9% respectively. The revision incorporates cuts to our pipe-
coating/pipe-manufacturing divisions’ revenue and engineering division’s FBM KLCI
PBT margin assumptions.
♦ Investment case. Although we are generally positive on the long-term
prospects of the stock, there are no visible M&A deals in the near term
and full-year FY10 earnings look soft. We thus opt to be conservative at
this juncture and downgrade our call on the stock to Underperform. The
share price is currently 13.3% above our revised fair value estimate of Yap Huey Chiang
RM2.04/share (based on an unchanged 13x FY11 PER) which suggests (603) 92802239
yap.huey.chiang@rhb.com.my
that the estimated 19.7% FD EPS growth for FY11 has already been
discounted by the market.

Please read important disclosures at the end of this report.

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13 August 2010

Looking to FY11 for better times

♦ Weak results in store. Softer numbers are expected in the upcoming 2QFY10 results (expected to be on 25
August) as the engineering division continues to suffer sluggish project replenishment while the pipe-coating and
pipe-manufacturing divisions were less active pending the start-up of the Gorgon project. The weaker quarter is
expected, given the dismal 1QFY10 quarterly results where net profit declined some 51% qoq and 24% yoy. At
that point, the engineering division was already facing difficulties, while full completion of the pipe-manufacturing
and coating work for the Sabah-Sarawak Gas Pipeline (SSGP) project led to reduced pipe-manufacturing earnings
in the quarter.

♦ Pipe-coating division. The Gorgon project effectively kicked-off in June 2010, hence a full quarter’s contribution
will only be from 3QFY10 onwards. The project is expected to take up 70% of Wah Seong’s pipe-coating capacity
and be completed in 2012. Management previously mentioned that they would complete 35% of the project in
FY10, 50% in FY11 and the remaining 15% in FY12. However, this has now been pushed back to 20% in FY10,
60% in FY11 and 20% in FY12. Beyond Gorgon, they are looking towards projects like Queensland Santos
Gladstone LNG (435km), Curtis LNG (575km) and Surat Gladstone LNG (515km) which should emerge in 2011
and replenish their contract flows for FY12 onwards.
♦ Australia plans still intact. We are mindful of the uncertainty surrounding the timeline of the awards and the
potential impact from the proposed 40% Petroleum Resource Rent Tax (PRRT) on onshore coal seam gas
producers. Recall, in our previous report “Back On Course In Australia” we mentioned that should the tax affect
the financial viability of the coal seam gas projects, there could potentially be cancellations or the consolidations
of these pipelines. Nonetheless, Wah Seong remains our most direct play for the LNG projects planned.

♦ Engineering division still facing headwinds. In 1QFY10, the division was hit by sluggish gas compressor
demand especially from their Singapore yard as the FPSO market came to a near standstill in FY09. Despite a
pick-up in enquiries since 2H10, actual contract wins remain elusive hence the recovery of the division could only
be in FY11. However, the positive long-term outlook for E&P in deeper waters suggests that the global FPSO
market is set for a rebound.

♦ Meaningful earnings recovery only in FY11. The effective start-up of the Gorgon project and pick up in
enquiries for the engineering division point towards a better 2H10. However, management guides a meaningful
recovery only by FY11, premised on full-year contribution of the Gorgon project. They also expect a general
improvement in the oil and gas industry, as they foresee present speculated E&P activities to materialise. This is
in line with our house view that the oil and gas industry will only turn more positive in 2011.
♦ Keeping M&A plans. Post the failed bid for Socotherm, management reiterate they are still actively looking for
M&A opportunities. At this juncture, they remain silent on prospective options, as plans are still very preliminary;
but as the Socotherm buy would have expanded their reach to Brazil, Middle East and the Gulf of Mexico, we
expect those markets to remain part of the company’s long-term expansion plans.

♦ Risks. 1) Prolonged delay in E&P spending beyond FY11; 2) Slower-than-expected economic recovery; and 3)
Cancellation of pipeline projects (especially that in Australia).

Forecasts And Assumptions

♦ Forecasts. In light of the near term earnings weakness, we trim our FY10-12 net profit estimates by 18.5%,
14.4% and 6.9% respectively. The revisions are mainly due to cuts in our pipe-coating/pipe-manufacturing
divisions’ revenue by 40% for FY10, 25% for FY11 and 4% for FY12. We also ease our engineering division’s PBT
margins assumptions to 24.5% for FY10 and 25% for FY11 and FY12 in light of the sustained weakness that it
faces.
♦ Investment case. We are generally positive on the long-term prospects for Wah Seong given that it is the 2nd
largest pipe-coater in the world and has exposure to the main pipeline markets like Australia and South East Asia.
However, as mentioned in our previous report there are no visible M&A deals in the near term and full-year FY10
earnings look soft. We thus opt to be conservative at this juncture and we downgrade our call on the stock to
Underperform. The share price is currently 13.3% above our revised fair value estimate of RM2.04/share (based
on an unchanged 13x FY11 PER) which suggests that the 19.7% FD EPS growth for FY11 has already been
discounted by the market.

A comprehensive range of market research reports by award-winning economists


Pageand
2 of analysts
4 are exclusively
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Table 2. Earnings Forecasts Table 3. Forecast Assumptions
FYE Dec (RMm) FY09 FY10F FY11F FY12F FYE Dec FY10F FY11F FY12F
Pre-tax margin (%):
Revenue 1,950.3 1,926.1 2,285.3 2,333.8
Pipe-coating 14.1 15.2 15.0
Engineering
EBITDA 280.1 265.4 336.9 354.9 24.5 25.0 25.0
14.4 13.8 14.7 15.2
Margin (%)

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

Interest expense (10.7) (26.7) (33.0) (40.0)

Associates 1.4 5.0 5.0 5.0


Source: Company data, RHBRI estimates

Oil and gas 233.1 194.9 255.8 262.1

Industrial services 37.0 31.2 32.8 34.5

Others (24.3) (10.0) (10.0) (10.0)

Pre-tax profit 245.8 216.1 278.6 286.6

Tax (39.5) (54.0) (69.7) (71.6)

Minorities (84.9) (40.4) (63.0) (57.9)

Net profit 121.3 121.7 145.9 157.0


Source: Company data, RHBRI estimates

Chart 1: Waseong Technical View Point


♦ The share price of Waseong emerged from the Sep
2009 – Mar 2010 sideways consolidation trend
when it broke out of the RM2.49 resistance level.

♦ The upswing led the stock to a fresh high of


RM2.83 in Apr 2010, but it was slapped with a
steep correction move almost immediately.

♦ The stock was subsequently pressed down to a low


of RM2.05 in Jun, before a stabilisation phase
occurred at above the RM2.18.

♦ It regained momentum and touched a high of


RM2.52, near the resistance level of RM2.49 in Jul.

♦ Of late, the stock has retraced from the previous


upswing and closed yesterday at RM2.35, with
more negative candles on the charts.

♦ Technically, it is still trapped within the support of


RM2.18 and the resistance of RM2.49.

♦ Investors should remain cautious on the stock, until


or unless it breaches either one of the levels above.

♦ A breakout from RM2.49 indicates a fresh “buy”


signal, while a fall from RM2.18 suggests further
downside risk.

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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
(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The
opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or
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
construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any
manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons
may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives
of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or
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RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing
investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB
Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity
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“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other
services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

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.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended
securities, subject to the duties of confidentiality, will be made available upon request.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the
actions of third parties in this respect.

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