Wah Seong Corporation Bhd
(Jan 28, RM2.36)
Maintain buy at RM2.37, target price at RM3.35: Wah Seong’s merger and acquisition (M&A) talks in Nigeria and Angola at advanced stages. We understand that Socotherm SpA’s strategic partner, Orlean, in West Africa has successfully acquired 100% of Socotherm’s pipe-coating assets and would soon sell them to Wah Seong  (estimated capital expenditure of US$8 million-US$10 million).

A new joint-venture company would then be set up and Wah Seong would then lease these assets back to the JV co. Currently, Orlean and Wah Seong are still negotiating on the equity ownership of the JV co, which the management expects to wrap up by 1Q10.

We understand from the management that its gas compressor business has not been doing very well amid stiff competition from American competitors given an oversupply in their markets. This has resulted in rental rates for new contracts being slashed by 15%-20%.

Currently, its gas compressor capacity is about 75,000 horse-power, with a utilisation rate of above 80% and most of the existing contracts being due only in the next one to two years.

Hence, the management is looking to acquire a new business — the supply of exploration and production products and services — which will fulfil its need for recurring income as earnings from the group’s pipe-coating contracts are mostly one-off.

We also gather that this new business would not be bigger than its existing business.

Wah Seong’s order book is still strong at RM1.4 billion. Although Wah Seong’s major new oil and gas orders have been rather slow in 2009, its order book has been consistent at RM1.4 billion over the year, despite a burn rate of about RM400 million-RM500 million/quarter as the smaller jobs across all its divisions helped to sustain the burn rate.

Out of the RM1.4 billion, about 60% is related to pipe coating (up from 20% in 1Q09), 14% for engineering (down from 31% in 1Q09) while the balance is mainly attributed to its agro-based engineering and infrastructure and building materials businesses.

Our target price is RM3.35 based on a price-earnings ratio (PER) of 14 times financial year ending Dec 31, 2010 earnings per share (EPS).

We like the company’s market leadership in the provision of pipe coating and corrosion protection in Asia as well as its potential in taking over from Socotherm the No 2 world ranking. — OSK Research, Jan 28

This article appeared in The Edge Financial Daily, January 29, 2010.