Wah Seong Corporation 3QFY08: Trying times…

December 10, 2008 at 7:24 am Leave a comment

• Below expectations
Wah Seong’s 9M08 annualised net profits came in 14.9% below house estimates and 18.8% below street estimates ex the RM13m gain from the disposal of Delco. Revenue however was significantly higher than ours for the quarter given higher recognition than expected for newly awarded pipe coating contracts as well as better performance in the industrial services segment. However, cost pressures appear to be seeping into group numbers hence putting a dampener to margins for the quarter especially in industrial services. Besides that, in 3Q, effective tax rate was higher at 32% bringing up 9M08 tax rates to 15.7% so far which is higher than our 13% estimates likely due to some deferred tax but this needs to be cross checked with management.
• Precarious going forward
While top line may have gotten a boost from the pipe coating contracts on hand like the SSGP, Turkmenistan and China pipelines, margins notably are a little bit softer than before at roughly 9% at EBIT level. The EPCC segment would also be a cause to this. We hence have brought down our margins to match. Looking forward, our concerns on orderbook replenishment, especially for the pipe coating segment, are deepening. So far, major pipeline news has only been heard from China but margins are known to be thin there and as jobs get pushed back around the world due to the current state of oil prices, we worry about competition over the scarce jobs for pipe coating. The deepwater flow assurance plant could also see a lack of deepwater jobs for some time given that unconventional projects are the first to take the chop in a market such as this. In view of this, we have brought down 2010 replenishment expectations hence the notable shrink in earnings for 2010.
• Downgrade to HOLD. Shaving off earnings.
We have lowered our earnings expectations due to the concerns stated above as well as the expectation of softer margins and this would be our second downgrade so far. To note, the first downgrade we did in October when oil prices were still around the US$70 level and we believe the situation has worsened since then. Earnings are pushed down by 10.1%, 20.5% and 18.6% for FY08, FY09 and FY10 respectively. As such, our target price for Wah Seong comes off to RM1.13 from RM1.60 before as we also apply a 10% discount to our PE of 9x given the group’s exposure
to deepwater developments. We must acknowledge though that the Group’s balance sheet health has seen vast improvement over the past 2 years with their ongoing restructuring efforts.

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