Saturday, July 12, 2014

Wah Seong ... Demerge O&G Biz

It may revive a plan to demerge its core oil and gas (O&G) business in 2015 that its various units are on stronger footing.

The demerger, which had been mooted in 2005, was shelved just months before the listing was to have taken place in the first quarter of 2012. The structure being considered then was a 1-to-10 share split for Wasco Energy, which houses the O&G operations, a dividend-in-specie of Wah Seong’s entire holding in Wasco Energy to the former’s shareholders and a public issue of new shares in Wasco Energy.

After a washout 2013, Wah Seong bounced back in the first quarter of 2014 with a net profit of RM20.6mil from a net loss of RM1.55mil a year earlier as its two major pipe-coating jobs, namely the RM627mil Polarled project for Statoil in Norway and RM232mil contract from Petroliam Nasional Bhd (Petronas) in the North Malay Basin, got underway.

Its pre-tax margins for pipe-coating have also recovered to 10% as at the first quarter from 5.33% in 2013.

Wah Seong had acquired 49% of Alam-PE Holdings (L) Inc, a joint-venture with Alam Maritim Resources Bhd, facilitating its entry into the offshore support vessel (OSV) business. Together with its 26.9% stake in brownfield O&G services provider Petra Energy, Wah Seong expects to reduce the wild swings in its earnings and establish a predictable baseline.

Wah Seong currently (10 July 2014) trades at 14.3 times projected earnings versus an average of 21.2 times for Malaysian O&G stocks, partly weighed down by its conglomerate discount.

Should a demerger take off, the group’s fast-growing renewable energy arm will have to fill the vacuum left by Wasco Energy.

Its renewable energy unit reported a pre-tax profit of RM64.63mil in 2013 on revenue of RM339.13mil, or a profit margin of 19.1%, easily the best of Wah Seong’s four main segments.

The standalone Wasco Energy deserves a scarcity premium for being among a handful of O&G pipe-coaters in the world with a market share of 10%. Once detached from the group’s loss-making plantation venture in Congo and low-margin industrial trading and services units, Wasco Energy could be valued at between 15 to 20 times earnings.

Alam-PE operates five OSVs, comprising an anchor handling tug supply vessel, two workboats and two supply vessels. All ships are on multi-year charters ranging from two to five years. The purchase will be immediately accretive to Wah Seong’s earnings, boosting its estimated net profit by 3.3% and 10.6% in 2014 and 2015, respectively.

What Wah Seong brings to the table is its international network in the oil-rich regions of West Africa, the Gulf of Mexico and the North Sea.

Both parties are already talking about cross-selling, and although their operational synergies are not readily apparent, Maccagno says they can leverage on each other’s customer base. He also hints at a possible three-way tie-up between Alam, Petra Energy and Wah Seong for marketing or operations.

Wah Seong is sitting on an RM1.7bil orderbook, 70% of which is for O&G work. The bulk of its RM700mil in outstanding pipe-coating orders will be completed in 2014.

The group has an orderbook of RM4bil if jobs from its associate and jointly-controlled companies is wholly accounted for.

The group is waiting on some RM4bil in tenders it has submitted for O&G jobs in South-East Asia, Central Asia and West Africa.

Wah Seong is also set to recognise profit from Petra Energy’s RSC in the second half of 2015 after production commences in all three fields, namely the Kapal, Banang and Meranti cluster offshore Terengganu. The RSC is a 70:30 JV between Thailand’s Coastal Energy and Petra Energy.

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