(Article by The Edge Daily, 30 June 2008)

While many enterprises are worrying about expensive energy costs eating into their profits, Wah Seong Bhd, however, is benefiting from the spiralling crude oil prices.

The current high oil prices encourage exploration and production activities by the oil majors worldwide. This generates demand for supporting services, ranging from oil pipes and oil rigs to vessels and drilling equipment.

Being the biggest pipe coater in Asia and one of the top three in the world, Wah Seong is at the forefront to secure lucrative contracts in current oil boom. The four contracts, with total value of RM370 million, that were awarded to Wah Seong last week speak well of the company’s ability to replenish its order book.

“We are upbeat over these continuous new order flows which reflect the buzzing environment in the oil and gas (O&G) sector,” says Aseambankers, which has a “buy” call on Wah Seong.

The newly secured jobs show that the loss the mega RM3.5 billion Nord Stream contract four months ago will not cripple the company’s earnings growth.

Some analysts comment, that in hindsight, not winning the Nord Stream contract could have been a stroke of luck. They reckon the job might not have been profitable as it was later awarded at a much lower price compared with Wah Seong’s bid.

This tells that the company, as the leading player in pipe coating, may be able to defend its profit margin by being selective with its projects.

The new jobs announced last Monday include coating pipes for the Gumusut Kakap shallow and deepwater projects and the Turkmenistan Block 1 Gas Development Project, as well as internal coating and equipment for the central Asia pipeline project.

According to Aseambankers, the latest contracts will boost Wah Seong’s pipe coating orders by 74% to RM850 million. Aseambankers estimates the company will fetch a total net profit of RM30 million from the new contracts, assuming a profit margin of 8%. The profit will be spread over two years starting from FY2008.

Wah Seong’s total order book is expected to swell to about RM2 billion from RM1.7 billion with the new contracts. The company is also bidding for jobs worth close to RM4 billion, with a large bulk of them abroad.

Giancarlo Maccagno, Wah Seong’s deputy group managing director, was once quoted saying the company has a hit rate of 50% for its pipe-coating jobs in Asia.

The Tan family, whose interests in property development includes the Mid Valley Megamall, is the substantial shareholder of Wah Seong.

Last year, it had a renounceable rights issue with detachable warrants and a bonus issue to raise some RM236 million to pare down its borrowings. Part of the fresh capital was used for expanding its deepwater coating facilities in Kuantan in order to win jobs in the Gumusut Kakap project.

Investment is yielding returns

The expansion allows Wah Seong to handle deepwater pipes, using deepwater glass syntactic polyurethane, which serves to insulate cold temperature and enhance flow.

“With more deepwater fields coming up in Malaysian waters over a longer term, we think Wah Seong stands a good chance of getting more such pipe-coating contracts from Petroliam Nasional Bhd,” says OSK Research.

The company achieved a net profit of RM28.9 million for 1Q2008, up 60% from RM18 million the previous corresponding period. Revenue rose to RM 510 million from RM429 million.

For FY2007, Wah Seong’s net profit surged nearly 130% to RM85.9 million from RM37.4 million in the year before. Earnings per share came in at 13.6 sen versus six sen previously.

The company’s share price was hammered when it dropped out of the multi-billion Nord Stream pipeline-coating project in February, sliding from year’s high of RM3.17 to RM2 in March. It closed at RM2.15 last Friday. Year to date, the counter has tumbled 30%, altho