April 16, 2010

WASEONG - Kenanga positive on Wah Seong tie-up in Nigeria

Stock Name: WASEONG
Company Name: WAH SEONG CORPORATION BHD
Research House: KENANGA

Wah Seong Corporation Bhd
(April 15, RM2.65)
Maintain buy at RM2.63 with target price of RM3.13
: Wah Seong announced on Wednesday that it had entered into a commercial assistance and technical support agreement with its Nigerian counterpart, Pipe Coaters Nigeria (PCN) that is owned by Orleans Group, in respect of the provision of three-layer and concrete pipe-coating services for any contracts PCN secures in Nigeria.

In our update dated March 17, we mentioned that we were positive should Wah Seong opt for the "technical assistance" route instead of committing an equity stake in the pipe-coating assets with Orleans Group, as it can focus on building its presence and brand gradually, and at the same time, get a feel of the operating conditions but at lower cost of entry (in monetary and country risk terms).

The management guided that while projects are being pursued, contribution should be immaterial, given that this is just a commercial support service agreement. Hence, no change to our estimates.

Nigeria is a market not to be missed. According to the Energy Information Administration, Nigeria has an estimated 36.2 billion barrels of proven oil reserves as of January 2009 and crude oil production that averaged 1.94 million bbl per day (Malaysia: 727,000 bbl per day), in 2008, making it the largest crude oil producer in Africa.

Major foreign producers in Nigeria are the likes of Shell, Chevron, ExxonMobil, Total, and Eni/Agip, while RM423 billion (75% of RM564 billion) has been earmarked for deep water exploration and production market in West Africa, Brazil and the Gulf of Mexico for the next five years.

Eyes are, of course, trained on Wah Seong's bid for Socotherm's distressed assets, as it opens up doors to the lucrative "deep water oil and gas hot spots" like Brazil, the Middle East and the Gulf of Mexico. Latest indications are that, creditors in Italy could surface by mid-May, and if everything goes smoothly, the acquisition could be completed within the year.

The management is keeping mum on the price tag, guiding only that cash and credit lines are already in place for the acquisition if it comes to fruition. Beyond that, they also guided the integration timeline of between 18 and 24 months.

We maintain buy at target price of RM3.13, based on 15 times FY10F. Our positive stance on the stock remains as Wah Seong's plum position as the second-largest pipe-coater in the world with potential expansion into new markets is a precursor to a higher earning capacity going forward. - Kenanga Research, April 15


This article appeared in The Edge Financial Daily, April 16, 2010.

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