JV a long-run positive for Wah Seong
KUCHING: Wah Seong Corp Bhd (Wah Seong) has entered into a Joint Venture and Shareholders’ Agreement (JV Agreement) with Lesso Home Service Holdings Ltd (Lesso) through its indirect wholly- owned subsidiary, Syn Tai Hung Trading Sdn Bhd (STHT).
In a recent filing with Bursa Malaysia, Wah Seong guided that the purpose of the JV Agreement was to combine the two companies’ capabilities and expertise to incorporate a new JV company that will provide the sale and distribution of building materials, architectural products and home furnishing goods.
The JV agreement stipulates that the initial issued and paidup share capital of the proposed new JV company shall be RM1 million which will be divided into a million ordinary shares of RM1.00 each and held in proportions of 49 per cent and 51 per cent by STHT and Lesso, respectively.
Wah Seong reasoned that as the expansion would be in line with the ‘One Belt One Road’ initiative of China and the strong surge of Chinese investment in Malaysia, it is anticipated that it would enhance long-term earnings of the group.
The research arm of Kenanga Investment Bank Bhd (Kenanga research) agrees with this view, noting that the “JV is positive in the long run riding on the growing bilateral trade between China and Malaysia.
In the near- medium term however, the research arm of Kenanga Investment Bank Bhd ( Kenanga research) expects minimal initial contribution from the expansion, and as such, have decided to maintain its financial year 2017 estimates ( FY17E) earnings for Wah Seong.
Despite this, the research arm is still highly positive on the expansion as the new proposed JV company would also be able to leverage on the extensive supply chain network of Lesso in China and the established distribution network of STHT in Malaysia.
Kenanga research maintains its ‘ Outperform’ call with an unchanged target price of RM0.96 pegging earnings to 10.0 fold of calendar year 2017 (CY17) price earnings ratio (PER), which is slightly higher than the research arm’s small-mid oil and gas sector valuation of 7-9 fold.
“Our target price also has an implied CY17 price by volume ( PBV) of 0.6 fold which is in line with the average oil and gas sector’s valuation and also consistent with its -1.0 standard deviation to its 5-year average forward PBV,” concluded the research arm.