WAH SEONG CORP BHD

Target Price: RM1.35

ALLIANCEDBS Research has initiated coverage on Wah Seong Corp Bhd with a “buy” rating and target price of RM1.35.

The research firm said the oil and gas services provider was set for a rebound after a kitchen-sinking exercise in 2016 amid improving dynamics.

“After two years in the doldrums amid collapse in crude oil prices and dwindling orderbook, earnings is poised to rebound from financial year 2017 (FY17).

“The turnaround was set in motion following the award of a 600 million euros (RM3bil) pipe-coating job for the Nord Stream 2 (NS2) project,” AllianceDBS said in its published note.

The house explained that the target price of RM1.35 was based on 12 times fully diluted FY18 forecast earnings per share (EPS), which is the sector’s weighted average priceto-earnings (PE) for small-cap players.

On the back of a total orderbook of RM3.5bil, AllianceDBS forecast an EPS compounded annual growth rate (CAGR) of 22% for FY17-FY19.

“With more stable crude oil prices, demand for pipe-coating and engineering services for the oil and gas sector should improve, going forward, as we pencil in a modest annual replenishment assumption of RM200mil,” AllianceDBS said.

Apart from the improved earnings outlook, Wah Seong is also loojing to pare down its over-leveraged balance sheet (1.07 times net gearing as of June 30) by disposing of non-core assets, including its loss-making 49%-owned plantation in Congo.

According to AllianceDBS, earnings recognition of the NS2 project will accelerate from second half of 2017 onwards as coating activities have progressed to double shifts during the period.

The progressive earnings delivery and consensus earnings (below our estimates) upgrades will act as share price catalysts.

Other potential catalysts include a stronger than expected orderbook replenishment that could re-rate Wah Seong and disposal of non-core assets.