Its been difficult to locate good companies at fair prices. After much reading and going through the research, Wah Seong looks like a no brainer. There is a genuine transformation in their outlook and approach. Being a billion ringgit company will only get you so far. They have managed to secure projects overseas but its always less than RM1bn in value as the bigger jobs would want a bidding company to be better capitalised. Wah Seong has laid out two acquisitions in their pipeline and have a good chance to secure both. One has sufficient leverage in the Golden Triangle, while the other will mark their platform into Africa.
While I generally frown on name changes, this time it makes sense to be a globally integrated energy infrastructure group - under Wasco. The name change proposal is more than just rhetoric. The management knows well enough that they would not have enough jobs locally to move to the next level.
Wah Seong is likely to wrap up the deal with Socotherm, to be followed by the Orleans deal. Wah Seong has sufficient funds to finance the acquisitions and has ruled out a fundraising exercise. As at Dec 09, the group had cash reserves of RM471m. Deputy MD Giancarlo Maccagno confirmed that Wah Seong had submitted three weeks ago a proposal to acquire the entire stake in Socotherm, an Italian pipe coater currently in financial trouble. There are four other bidders whose identities are not disclosed. Wah Seong did not reveal its offer price.
The success of the proposal would give Wah Seong an immediate presence in the Golden Triangle of Brazil, the Middle East and the Gulf of Mexico. There will be about US$130bn worth of investments in deepwater exploration are expected to be made in the Golden Triangle over the next five years. Hence, management is optimistic that Socotherm’s annual revenue could return to its previous height of €250m-300m in at least two years compared with €130m currently. This could add no less than RM1bn to Wah Seong’s topline.
Wah Seong's management has done its justification for moving this way, and they are going in with somebody whom they are already well familiar. Ties with Socotherm go way back. Socotherm and Wah Seong are no strangers, having been partners in pipe coating unit PPSC for 19 years before Socotherm sold its 32.5% stake to Wah Seong for RM76m in Oct 09 to cover some of its losses. Maccagno was a project manager for Socotherm’s projects in Nigeria in 1984-1990.
Wah Seong is at an advanced stage of negotiations with Orleans, which owns pipe coating plants in Nigeria and Angola. The group is considering three options: taking up an equity stake, providing technical assistance and doing both. Originally, the plants were housed under a 40:60 JV between Orleans and Socotherm. In Dec 09, Orleans bought out Socotherm’s stake in the JV as the latter restructured its finances. Orleans’s two pipe coating plants generate annual revenue of around US$40m. The facilities are currently loss-making but Wah Seong sees potential in them and the countries in which they are located. Nigeria and Angola are OPEC members and had oil reserves of 37bn barrels and 10bn barrels, respectively, in 2008. Collectively, both countries held 4.5% of OPEC’s oil reserves of 1,023bn barrels in 2008. Wah Seong is likely to spend about US$10m-15m on the facilities. If the deal materialises, it could expand Wah Seong’s earnings and geographical base, and put the company in a monopolistic position in Angola and a duopolistic position in Nigeria.
Wah Seong is well aware of the risks with Orleans, being in Nigeria. To mitigate the huge risks in Nigeria, Wah Seong is looking at a technical arrangement to first provide pipecoating consultancy services to the Orleans Group, with an option to later buy an equity stake if the operation were to kick off successfully.
By international standards, Wah Seong’s current market capitalisation of RM1.8bn is modest and has, on occasion, hampered it in its bid for major deals. With a bigger market cap, the company would be in a better position to go for bigger prizes internationally. Backed by the Socotherm and Orleans acquisitions, management aims for a RM3bn market cap over the next few years.
When the group was listed in 2002, its market cap was RM250m. Presently, Wah Seong’s order book is worth RM1.42bn. The group is bidding for RM5.3bn worth of contracts. Wah Seong’s tenders for new jobs has grown from RM4bil from the past two months to RM5.3bil currently. This represents 3.8x the group’s existing outstanding order book of RM1.4bil. Assuming a 20% success rate for current tenders, the group’s order book could reach RM1.8bil by the end of the year.
Its pipe-coating and corrosion production services account for 60% of this tender book. The pipe-coating tenders are for jobs in South-East Asia, China and Australia. The balance 40% of the tender book value comprise gas compression equipment and packages and industrial services.
The acquisition plans, assuming they pan out, would give Wah Seong access to a string of new markets, namely Nigeria, Angola, Brazil, the Middle East and the Gulf of Mexico, thereby narrowing the gap between itself and Bredero, whose annual sales are in excess of US$1bn. Apart from the M&A efforts, the newsflow is also remain active on the order book front as Wah Seong awaits the awards of pipe coating contracts from clients in Australia and Papua New Guinea.
Even without the two acquisitions, Wah Seong should be fairly valued at RM3.00. Once news comes through that the acquisitions have been firmed up, I expect Wah Seong to trade close to its higher PER band of 20x, which would suggest RM3.50 as a target.
Its almost pointless to compare Wah Seong with other similar industry players in valuation, locally and regionally as none has the ability to boast that it is a major player globally, none can say they are not terribly dependent on local jobs. We need more companies to follow Wah Seong, manage it well, grow locally, then regionally, and when you consider that you have the management expertise and technological professionalism to be competitive globally, just leverage onto the next platform.
p/s photos: Asin
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