Maybank IB cuts forecast for Wah Seong on tough O&G outlook

  • Business
  • Wednesday, 01 Jun 2016

Wah Seong Corp Bhd

By Maybank IB Research

Sell (maintained)

Target price: 13 sen

WAH SEONG first quarter results came in below the research house’s expectation, with a core net loss of RM2mil compared with net earnings of RM27mil a year ago.

The results missed Maybank IB and consensus’ initial financial year net profit estimates of RM20mil and RM60mil respectively.

All divisions reported weaker year-on-year (y-o-y) performance with the oil and gas division performing the worst, a key drag to group earnings.

It reported lower revenue by 49% with a pre-tax loss of RM16mil.

Its plantation division remained loss-making for the 13th consecutive quarter, albeit with a lower y-o-y pre-tax loss of RM1mil for the quarter under review.

The renewable energy and industrial and trading services operations reported 33% and 36% y-o-y fall in pre-tax profits.

This prompted a 78% to 133% cut in financial year 2016 and 2017 earnings.

Depleting orders, erosion in margins and replenishment risks are key concerns, reflecting the challenging operating outlook.

Despite a 42% fall in share price over a 52-week period, risks still outweigh rewards with minimal catalyst to re-rate and valuations are expensive.

Maybank Ib said Wah Seong order backlog continued to deplete to RM715mil in the first quarter.

Despite the recovery in oil price, the depleting order book and earnings trends are expected to continue over the next two to three quarters.

Should the oil price outlook continue to improve, any sign of Wah Seong operational recovery will only be seen from second half of 2017, in Maybank IB view due to the lag effect in the rejuvenation of upstream capex plans globally.

Thus, Maybank IB has cut Wah Seong 2016 to 2017 forecast largely reflect the challenging outlook at its oil and gas division.


By Kenanga Investment Bank

Underperform (maintained)

Target price: RM8

KENANGA opined that the positive capacity expansion contribution from Rawang (from second quarter of 2016) and Kanthan (from end third quarter of 2016) will be negated by intense price competition and capacity expansion of other cement players in the industry.

Management recap that first quarter revenue was down by 3.8% year-on-year mainly due to weaker cement revenue (on higher domestic supply and slower demand from residential and commercial segment.

Meanwhile, the first quarter core net profit came in lower by 66.5% y-o-y on the back of lower revenue, higher-than-expected margin compression in cement segment, and one-off Holcim integration cost.

Kenanga said weakening residential and commercial segments would drag overall growth.

While management is looking forward to major infrastructure projects such as MRT2, LRT3, RAPID Pengerang project, Tun Razak Exchange and Bandar Malaysia from second half of this year onwards, management highlighted that a single infrastructure project may not be sufficient to cover the overall shortfall due to slowdown in residential and commercial segment. This coupled with additional 14.0% capacity increase in the peninsula means that the group has to secure more projects in order to handle the slowdown in demand.

Given current stiff pricing competition, Kenanga concurred with management and maintain our cautious view on earnings outlook.

Post-briefing, Kenanga trimmed its 2017 earnings estimates by 2% with lower target price of RM8 from RM8.18, based on unchanged 2017 price-to-earnings ratio of 21.8 times on five-year historical -0.5SD level.

QL Resources Bhd

By JF Apex Securities Bhd

Hold (downgraded)

Target price: RM4:37

QL RESOURCES’ for quarter financial year 2016 net profit was reported at RM38.07mil, down 34.2% quarter-on-quarter (q-o-q) and 19.9% year-on-year (y-o-y).

Revenue stood at RM768.9mil, increased 4.2% q-o-q and 15.7% y-o-y.

For full year 2016, net earnings were recorded at RM192mil, up 4.9% y-o-y compared with core net profit in financial year 2015 after stripping aside the fair value gain on reclassification of associate (Lay Hong Bhd) to available-for-sale investment that amounted to RM8.3mil in 4QFY15.

Similarly, 12MFY16 revenue of RM2852.6mil was 5.4% higher than a year ago. The group’s full year 2016 net profit was below JF Apex and consensus expectations by accounting for 88% to 91% of full year estimates mainly due to the weaker showing of palm oil activities (POA) division and integrated livestock (ILF) division.

The group’s net profit in 2016 posted a single digit growth for its topline and bottom line compared with last year. The encouraging performance in marine product manufacturing (MPM) division failed to overcome the disappointing earnings contribution from POA division and ILF division. MPM division remained the star performer as its 2016 pre-tax profit expanded by 28.6% y-o-y mainly due to higher export growth of fishery products .

Disheartening performance of the POA division was due to lower fresh fruit bunches processed by Sabah palm oil unit as well as lower selling prices of crude palm oil.

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