News Yesterday, Wah Seong Corporation (WASEONG)
announced that it has entered into a conditional share sale and purchase
agreement to acquire 49% of Alam-PE (JV of Alam Maritim (ALAM; OP; TP: RM1.86) for a cash consideration of RM106m from outgoing CIMB-PE. Management has yet to decide on the financing options.
The proposed acquisition is subject to an extraordinary general meeting (EGM) and is expected to be completed by 3Q14.
Comments We were pleasantly surprised by this announcement despite that WASEONG’s forte is in pipe-coating; nonetheless, we deem this a positive investment route as:
(i) the acquisition is at a decent estimated CY14 PER of 6.3x (assuming stagnant PAT of RM16.8m in CY14 (49%-stake) versus market’s average CY14 PER 15.4x for mid-cap stocks;
(ii) assuming a 80:20 or 70:30 financing to support the acquisition will only raise net gearing to 0.5x (from 0.4x in 1Q14);
(iii) the vessels (please refer to next page for fleet profile) currently have a blend of spot and long-term contracts ( up to 3-5 years) which basically underpins its earnings prospects and promotes more recurring income for WASEONG which typically sees lumpy earnings; and
(iv) WASEONG will leave the management of the fleet to a subsidiary of ALAM, which is very experienced in this field.
Assuming no change in earnings (ie. stagnant RM16.8m), a quarter earnings in FY14 and full-year earnings for FY15, WASEONG’s net profit will increase by 3.3% and 10.6% respectively to RM99.7m and RM132m (from RM96.6m and RM119.4m respectively).
Outlook Should this acquisition go through, WASEONG will be buying into a fleet that includes two accommodation vessels. One is currently on an optional 2-year term of its contract; whilst the other will soon see contract expiry. Given the tight supply of such vessels (a majority of the such vessels are commissioned) we see no issues for this vessel in securing contracts with additional upside being a probable raise in daily charter rates (DCR)
Current earnings drivers are an order book which is largely dominated by pipe-coating contracts at RM1.7b (from RM1.7b in Dec-13) and PENERGY’s contribution to WASEONG is expected to increase once work commences on the Pan Malaysia hook-up and commissioning contract and the RSCs start to contribute (first oil purportedly reached). Tender book is guided to be RM4b with almost all being oil and gas projects.
Other catalysts will be the successful takeoff of the joint-venture pipecoating plant in Louisiana (JV with Insituform).
Forecast We are maintaining our FY14-15E forecasts for now until the completion of the acquisition.
Rating Upgrade to OUTPERFORM (from MARKET PERFORM)
Valuation Whilst the acquisition has yet to be completed, we are raising our PER for the stock to 14x (from 13x previously) on the back of better earnings prospects with the acquisition. This raises our TP to RM2.17 (from RM2.00).
Our target PER is a discount of c.6.7% to other mid-cap vessel peers that we ascribed 15x PER as WASEONG is just an investor at this juncture.
With the current total return of 16.3% (13.7% to share price and 2.6% dividend yield) we upgrade the stock to an OUTPERFORM.
Risks to Our Call (i) Securing less contracts and (ii) lower-than-expected margins.
Source: Kenanga
The proposed acquisition is subject to an extraordinary general meeting (EGM) and is expected to be completed by 3Q14.
Comments We were pleasantly surprised by this announcement despite that WASEONG’s forte is in pipe-coating; nonetheless, we deem this a positive investment route as:
(i) the acquisition is at a decent estimated CY14 PER of 6.3x (assuming stagnant PAT of RM16.8m in CY14 (49%-stake) versus market’s average CY14 PER 15.4x for mid-cap stocks;
(ii) assuming a 80:20 or 70:30 financing to support the acquisition will only raise net gearing to 0.5x (from 0.4x in 1Q14);
(iii) the vessels (please refer to next page for fleet profile) currently have a blend of spot and long-term contracts ( up to 3-5 years) which basically underpins its earnings prospects and promotes more recurring income for WASEONG which typically sees lumpy earnings; and
(iv) WASEONG will leave the management of the fleet to a subsidiary of ALAM, which is very experienced in this field.
Assuming no change in earnings (ie. stagnant RM16.8m), a quarter earnings in FY14 and full-year earnings for FY15, WASEONG’s net profit will increase by 3.3% and 10.6% respectively to RM99.7m and RM132m (from RM96.6m and RM119.4m respectively).
Outlook Should this acquisition go through, WASEONG will be buying into a fleet that includes two accommodation vessels. One is currently on an optional 2-year term of its contract; whilst the other will soon see contract expiry. Given the tight supply of such vessels (a majority of the such vessels are commissioned) we see no issues for this vessel in securing contracts with additional upside being a probable raise in daily charter rates (DCR)
Current earnings drivers are an order book which is largely dominated by pipe-coating contracts at RM1.7b (from RM1.7b in Dec-13) and PENERGY’s contribution to WASEONG is expected to increase once work commences on the Pan Malaysia hook-up and commissioning contract and the RSCs start to contribute (first oil purportedly reached). Tender book is guided to be RM4b with almost all being oil and gas projects.
Other catalysts will be the successful takeoff of the joint-venture pipecoating plant in Louisiana (JV with Insituform).
Forecast We are maintaining our FY14-15E forecasts for now until the completion of the acquisition.
Rating Upgrade to OUTPERFORM (from MARKET PERFORM)
Valuation Whilst the acquisition has yet to be completed, we are raising our PER for the stock to 14x (from 13x previously) on the back of better earnings prospects with the acquisition. This raises our TP to RM2.17 (from RM2.00).
Our target PER is a discount of c.6.7% to other mid-cap vessel peers that we ascribed 15x PER as WASEONG is just an investor at this juncture.
With the current total return of 16.3% (13.7% to share price and 2.6% dividend yield) we upgrade the stock to an OUTPERFORM.
Risks to Our Call (i) Securing less contracts and (ii) lower-than-expected margins.
Source: Kenanga
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