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18 August 2014

HLIB Research PP 9484/12/2012 (031413)

WZ Satu Berhad (Not Rated) COMPANY INSIGHT INDUSTRY: OVERWEIGHT

August 18, 2014 Not Rated

Share Price: RM2.28

Transformation with Multi-Growth Drivers Highlights

Transforming with new major shareholder… In August 2013, Tengku Uzir Bin Tengku Ubaidillah started to acquire stake in WZ Satu and emerged as a substantial shareholder. The emergence of Tengku Uzir has marked a turning point for the company with subsequent acquisitions to venture into the construction, mining and oil & gas industries. The company officially changed its name to WZ Satu Bhd in October 2013 to reflect the diversification from the ailing steel business.

Windfall from bauxite mining… In January 2014, SE Satu (49% owned by WZ Satu) entered into an exclusive mining contract to mine, extract and produce bauxite ore from eight hills measuring 66 hectares in Kuantan, Pahang for a period of 36 months with conservative reserve of 1.2m tonnes. We estimate this division to contribute 35-50% of FY14-FY16 earnings.

Maiden venture into O&G… In July 2014, WZ Satu proposed to acquire Misi Setia Oil & Gas Sdn Bhd for a purchase consideration of RM27m. It is mainly involved in the design, procurement, fabrication, installation and commissioning of skid packages, onshore oil and gas pipeline transmission system and plant terminal projects. Given Misa Setia’s experience in EPCC for onshore facilities and Metering System, we expect Misa Setia to get a slice from the RAPID project.

Growth from construction division… Majority of the key personnel (including the founders) had formerly worked with Road Builder, IJM or Gamuda. WZ Satu currently has an order book of RM309m, including the recently secured DUKE Phase 2 parcel (RM110m) to keep them busy until FY2016. WZ Satu has to date tendered for some RM1.9bn jobs, which we expect some of the wins will boost the current order book and grow the profitability of the construction division.

Strong earnings growth… Net profit is expected to grow at CAGR of 67% from FY14 to FY16. Going forward, we see upside risks to our forecasts from (i) potential acquisition of new O&G business; (ii) upside to bauxite reserves; (iii) potential rationalizing of steel business and re-investment into O&G business with higher ROI; and (iv) stronger-than-expected growth from civil engineering.

Catalysts Additional earnings contribution from new O&G acquisition. Potential upside to bauxite ore reserves. Potential rationalization of steel business and re-investment

into O&G business with higher ROI. More contract wins from civil engineering division.

Risks Fluctuation in the crude oil & bauxite ore price; Indonesia lifting mineral export ban; project execution ability; delay in contract awards.

Valuation The company is trading at 15x FY15 P/E, slightly premium as compared to O&G peers at 12-14x. We believe the premium is justifiable after taking into account the strong earnings growth prospect with PAT expect to grow at CAGR of 67% from FY14 to FY16.

Jason Tan Yat Teng, CFA yttan@hlib.hongleong.com.my (603) 2176 2751 KLCI 1,864.3 Expected share price return NA Expected dividend return NA Expected total return NA Share price

95

105

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0.300.500.700.901.101.301.501.701.902.102.302.50

Aug-13 Oct-13 Dec-13 Jan-14 Mar-14 May-14 Jul-14

(%)(RM)

WENG (LHS) KLCI (RHS)

Information Bloomberg Ticker WENG MK Bursa Code 7245 Market cap (RMm) 433 3-mth avg volume (‘000) 548 SC Shariah-compliant Yes Price Performance 1M 3M 12M Absolute % 49.0 150.5 586.7 Relative % 49.7 153.1 558.1

Major shareholders (%) Tengku Uzir Tengku Ubaidillah 27.6% Tan Ching Kee 24.4% Dato’ William Tan Chee Keong 6.1% Summary Earnings Table FYE Aug (RM m) 2013A 2014E 2015E 2016E Revenue 87 139 389 453 EBITDA 2 22 61 62 PATAMI 3 15 39 41 EPS (sen) 2 6 15 16 P/E (x) 92.4 40.1 15.2 14.3 BV /share 0.66 0.52 0.94 1.10 P/BV (x) 3.47 4.35 2.43 2.08 ROA (%) 2.3 8.4 11.3 10.3 ROE (%) 3.7 10.9 16.0 14.5

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18 August 2014

COMPANY BACKGROUND

WZ Satu Bhd, formerly known as Weng Zheng Resources Bhd or WZ Steel Bhd, was listed on the Second Board on 2 January 2008. Prior to August 2013, WZ Satu was a steel company specializing in manufacturing and trading of precision cold drown (CD) steel bars which are used mainly in the office, computer and automotive segments. The global financial crisis in 2008-09 had greatly affected the demand and prices of steel products. Besides, profitability of WZ Satu (WZ Steel back then) was also eroded by writing down of inventory, higher operating costs as well as intense competition. In August 2013, Tengku Uzir Bin Tengku Ubaidillah started to acquire stake in WZ Satu and emerged as a substantial shareholder. Tengku Uzir continued to raise his stake through the open market and was appointed as the company’s chairman on 24 October 2013. The emergence of Tengku Uzir has marked a turning point for the company with subsequent business acquisitions to venture into the construction, mining and oil & gas industries. The company officially changed its name to WZ Satu Bhd on 30 October 2013 to reflect the diversification from the ailing steel business.

Figure 1: Current Business Structure of WZ Satu Bhd

Source: Company

Mining Venture

The maiden move by Tengku Uzir after he came on board was to subscribe for a 49% stake in SE Satu Sdn Bhd for RM490,000 on 3 December 2013. The other 51% stake of SE Satu is owned by Spring Energy Sdn Bhd, an established local quarrying expert with 15 years of mining track record. On 10 January 2014, SE Satu entered into an exclusive mining contract to mine, extract and produce bauxite ore from eight hills measuring 66 hectares in Kuantan, Pahang for a period of 36 months. A geological evaluation report for the mining site showed a conservative bauxite ore reserve of 1.2m tonnes. The appointment of SE Satu as the exclusive mining operator was by Kreatif Selaras Mining Sdn Bhd, a 60% subsidiary of Tanah Makmur Bhd (common shareholder with WZ Satu as Tengku Uzir owns 10.8% of Tanah Makmur post-IPO listing). The exclusive mining contract comes with a fixed rate of US$13.75/tonne with a minimum performance tonnage per month of 50,000. SE Satu is entitled to an additional payment of US$0.30 for every US$1.00 excess over the selling price (FOB basis) of more than US$40/tonne. On the downside, SE Satu shall see reduction in payment of US$0.30 for every US$1.00 shortfall if actual selling price falls below US$40/tonne.

Formerly known as Weng Zheng Resources Bhd or WZ Steel Bhd, was listed on the Second Board on 2 January 2008

Emergence of Tengku Uzir marked a turning point for WZ Satu with subsequent business acquisitions to venture into the construction, mining and oil & gas industries.

SE Satu entered into an exclusive mining contract in Jan 2014 to mine, extract and produce bauxite ore from eight hills measuring 66 hectares in Kuantan, Pahang for a period of 36 months.

Construction (100% owned KenKeong Sdn Bhd)

Mining (49% owned SE Satu Sdn Bhd)

Oil & Gas (100% owned Misi Setia Oil & Gas Sdn Bhd)

Steel (100% owned Weng Zheng Trading Sdn Bhd, Weng Zheng Marketing Sdn Bhd, Weng Zheng Sdn Bhd & PT WZ Steel)

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18 August 2014

The demand for bauxite has spiked up since January 2014 after the mineral export ban imposed by Indonesia. China, the largest base-metal user, continued to source bauxite ore (an input to produce aluminium) from regional countries, including Malaysia, after the Indonesian export ban. Since the start of mining activity in early 2014, the management is confident that an extraction rate of 90,000 tonnes per month can be sustained in FY15 & FY16. The management has also indicated that the actual selling price of bauxite has been stable ~US$46-47/tonne since beginning of the year.

O&G Heat

On July 14, WZ Satu proposed to acquire Misi Setia Oil & Gas Sdn Bhd for a purchase consideration of RM27m. Misi Setia was incorporated in June 2002 and is mainly involved in the design, procurement, fabrication, installation and commissioning of skid packages, onshore oil and gas pipeline transmission system and plant terminal projects. Misi Setia is also engaged in oil and gas product trading (exclusive distributor for CAMERON Valve and GE Flowmeters) and provision of after-sales services. Misa Setia has 2 fabrication yards with total land area of 4.2 acres located at Kajang and Bintulu. Some notable projects that have been delivered are biodiesel package 5 projects, mechanical and piping work for the Hijau Gasoil Project for Shell Refining and EPCC of Kuantan Bulk Depot and EPCC of Labuan Gas Terminal.

Figure 2: Oil & Gas Pipeline Works

Company, HLIB

Figure 3: Skid Packages

Company, HLIB

Misi Setia is mainly involved in the design, procurement, fabrication, installation and commissioning of skid packages, onshore oil and gas pipeline transmission system and plant terminal projects.

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18 August 2014

The acquisition comes with an average guarantee profit of RM4m per annum from 2015-2017. This translates to 6.8x FY15 P/E which is deemed attractive versus the average oil & gas peers at 12-14x. We understand that the latest order book stand at RM130m with strong tender book of RM330m.

On 4 April 2014, Petronas has approved the final investment decision (FID) for the development of the Pengerang Integrated Complex (PIC), to be located on 6,424 acres of land in Pengerang, Johor. The proposed development is anticipated to be bigger than the combined Petronas existing downstream complexes in Melaka, Terengganu, Pahang and Sarawak. The project comprises of a refinery with refining capacity of 300,000 barrels per day (bpd), a naphtha cracker and petrochemical complexes with an annual combined production of approximately 3m tonnes of petrochemical related products. In addition, there will also be a Power Plant (~2,000MW in electricity) and LNG Regasification facilities (10m tonnes pa vs. 3.8m tonnes pa from RGT-1 Terminal in Melaka) to support RAPID operational requirement.

RAPID is estimated to cost about US$16bn (or RM52.5bn) while the associated facilities will involve an investment of about US$11bn (or RM36.1bn). Total investment worth RM88.6bn vs. RM60bn reported previously. According to JPDC, the Pengerang Integrated Petroleum Complex (PIPC) is estimated to attract RM170bn of investment for the next 10-15 years and it aims to be the “Rotterdam of the East”. Given Misa Setia’s experience in EPCC for onshore facilities and Metering System, we expect Misa Setia to get a slice from the RAPID project. We expect more EPCC awards to accelerate in next few months after site preparation. Cogeneration Plant and Raw Water contracts have been awarded to ensure that PIC will be operational in time (early 2009). To note, there are potential more EPCC works if potential foreign investors commit their final investment decision on RAPID as PIPC is expected to attract RM170bn investment for next 10-15 years.

Figure 4: PIPC Layout

JPDC, HLIB

In addition, the management is constantly looking out for acquisition opportunities in the oil & gas industry to further grow the business. With the recently proposed private placement of 57m shares, we do not rule out the possibility that another acquisition may be concluded within a year.

Misi Setia’s profit guarantee translates to 6.8x FY15 PER which is deemed attractive.

We expect Misa Setia to get a slice from the RAPID project.

The management is constantly looking out for O&G acquisition opportunities to further grow the business.

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18 August 2014

Construction Endeavour

On 10 January 2014, WZ Satu acquired KenKeong Sdn Bhd, a G7 contractor specializing in building and civil engineering works for RM27.5m. KenKeong was founded by Dato’ Ir. William Tan Chee Keong and Choi Chee Ken, who have more than 25 years of civil engineering experience. Majority of the key personnel (including the founders) had formerly worked with Road Builder, IJM or Gamuda. The acquisition of KenKeong comes with a vendor PATMI guarantee of RM17m for the first three financial years and a shareholders’ fund guarantee of RM27.5m as at 31 August 2017. There is also a 5-year service agreement for key management personnel. WZ Satu currently has an order book of RM309m, including the recently secured DUKE Phase 2 parcel (RM110m) to keep them busy until FY2016. WZ Satu has to date tendered for some RM1.9bn jobs, which we expect some of the wins will boost the current order book and grow the profitability of the construction division.

Legacy Steel Business

The steel segment of WZ Satu was the principal business of WZ Steel before Tengku Uzir came on board and subsequently acquired the construction, mining and oil & gas ventures. The commencement of its precision CD steel bar business dated back to as early as 1995. The steel division came under severe pricing pressure in 2008 and 2009 with shrinkage in demand due to global financial crisis. Revenue performance has been relatively flat since listing in 2008, while GP margin has declined to 10.3% in FY13 from 18.2% in FY08. In April 2012, WZ Satu has purchased an industrial land in West Java, Indonesia to set up a factory for precision CD bar manufacturing mainly to cater for the growing Indonesian market. The total investment cost for the steel plant (including land purchase) amounted to RM16m. The management is cautiously optimistic that its Indonesia steel business, which has started operation in early 2014, will contribute positively to its overall performance of steel division. The management is also actively exploring options to further rationalize its steel business in Malaysia.

Financial Forecast

Figure 5: Financial Figures from 2012-2016.

Company, HLIB

KenKeong currently has an order book of RM309m, including the recently secured DUKE Phase 2 parcel (RM110m) to keep them busy until FY16.

The management is actively exploring options to further rationalize its steel business in Malaysia.

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18 August 2014

We have forecasted WZ Satu’s revenue to grow by CAGR of 81% from FY14 to FY16 mainly due to full inclusion of civil engineering and bauxite mining businesses coupled with contribution from oil & gas. During the same period, net profit is expected to grow at CAGR of 67%. Going forward, we see upside risks to our forecast from (i) potential acquisition of new O&G business if the private placement is successful; (ii) upside to bauxite reserves; (iii) potential rationalizing of steel business and re-investment into O&G business with higher ROI; and (iv) stronger-than-expected growth from civil engineering. Earning forecast breakdown are shown in Figure 6.

Figure 6: Earning Forecast Breakdown

Company, HLIB

Corporate Exercises

Free warrants… On 1 July 2014, WZ Satu proposed issuance of free warrants for existing shareholders on the basis of 1 free warrant for every 2 existing ordinary shares with a tenure of 10 years and an exercise price of RM0.60/warrant. The proposed free warrant is subject to the approval of the shareholders at an EGM tentatively scheduled in September. We expect the free warrant proposal to create some excitement for share price performance in the near term.

Private placement of 57m shares (30% of share capital)… The company also proposed new share placement of 57m (30% of existing paid-up share capital) to Bumiputera institutions and investors. 19m shares (10% of share capital) have been subscribed by Lembaga Tabung Haji at an issue price of RM0.84/share. WZ Satu has 6 months to identify the investors for the remaining 20% placement shares. The proceeds raised from the private placement will be utilised for future investment in the oil & gas industry. The placements shares are not entitled to the free warrants.

Risks

Fluctuation in the oil & bauxite ore price… Extended low oil price will discourage exploration while extremely high oil price may reduce the demand for petrochemical product which leads to lower demand on Misi Setia’s products and services. In addition, a slump in global aluminium price may result in lower demand and pricing of bauxite ore. SE Satu will see reduction in payment of US$0.30 for every US$1.00 should actual bauxite ore selling price (FOB) fall below US$40/tonne (currently ~US$47/tonne).

Net profit is expected to grow with CAGR of 67% from FY14 to FY16.

Proposed free warrants to create share price excitement.

Getting ready for further oil & gas investment with proceeds raised from private placement

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18 August 2014

Indonesia lifting mineral export ban… Global supply of bauxite ore will surge if Indonesia lifts its mineral export ban (in place since 12 Jan 14). This will cause bauxite ore price to experience downward pressure. In 2013, Indonesia supplied 68% of China’s bauxite ore imports.

Project execution ability… Failure to execute project within a contract timeframe will lead to cost overruns and depression in margin.

Delay in project award… Any delay or reducing capex from oil majors will impact the company order book replenishment rate which leads to lower utilisation rate.

Valuation

The company is trading at 15x FY15 P/E, slightly premium as compared to O&G peers at 12-14x. We believe the premium is justifiable after taking into account the strong earnings growth prospects with PAT expected to grow at CAGR of 67% from FY14 to FY16.

The company is trading at 15x FY15 P/E, slightly premium as compared to O&G peer at 12-14x.

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Income statement Cashflow

FYE 31 Aug (RM m) 2012A 2013A 2014E 2015E 2016E FYE 31 Aug (RM m) 2012A 2013A 2014E 2015E 2016ERevenue 85 87 139 389 453 EBIT 3 5 24 64 65 Operating cost -86 -85 -117 -327 -392 D&A (3) (3) (2) (3) (3) EBITDA -1 2 22 61 62 Working capital changes (12) 5 19 (68) (18) D&A 3 3 2 3 3 Taxation (0) (0) (2) (7) (8) Net Interest -2 -2 0 0 0 Others 7 2 (6) (16) (15) Associates - - 6 16 15 Operating cashflow -7 7 26 -48 5Jointly controlled entities - - - - - Capex & acquisitions 0 -8 -28 -27 0Exceptionals - - - - - Free cashflow -7 -1 -1 -75 5Pretax profit 1 3 17 46 49 Others 0 8 0 0 0Taxation (0) (0) (2) (7) (8) Investing cashflow 0 1 -28 -27 0Minority Interest - - - - - Equity Raised 0 0 48 68 0Discontinued - - - - - Investment securities 0 0 0 0 1PATAMI 1 3 15 39 41 Net Borrowing 6 -5 -29 0 0Core PATAMI 1 3 15 39 41 Others 0 0 0 0 1Basic shares (m) 110 110 258 258 258 Financing cashflow 5 -6 19 68 0Basic EPS (sen) 0.7 2.5 5.7 15.0 16.0 Net cashflow (2) 2 18 (7) 5

Balance sheet Valuation ratios

FYE 31 Aug (RM m) 2012A 2013A 2014E 2015E 2016E Net DPS (sen) 0.00 0.00 0.00 0.00 1.00Fixed assets 45 46 75 105 108 FCF/ share (sen) -6.76 -0.67 -0.46 -29.06 2.09Other long-term assets 0 0 6 22 36 FCF yield (%) -3.0% -0.3% -0.2% -12.7% 0.9%Other short-term assets 0 1 1 1 1 Market capitalization (m) 588 588 588 588 588Working capital 81 82 107 298 348 Net cash (m) -35 -30 17 10 16Receivables 26 28 38 106 124 Enterprise value 623 617 571 578 572Payables 9 12 34 96 112 EV/ EBITDA (x) -489.8 318.4 26.1 9.4 9.3

Inventory 46 41 34 96 112Net cash / (debt) -35 -30 17 10 16 Growth margins ratios

Cash 1 3 21 14 19 Growth (%)ST debt 34 29 0 0 0 Sales Growth NA 2.7 60.0 179.3 16.7LT debt 3 4 4 4 4 Operating expenses NA -1.1 38.0 179.2 19.7Shareholders' funds 70 72 135 242 283 EBITDA Growth NA -252.4 1,026.1 180.0 0.8Share capital 50 50 95 129 129 PBT Growth NA 120.6 499.0 171.9 7.5Reserves 20 22 40 113 154 PATMI NA 238.7 440.8 164.5 6.0Minorities - - - - - Basic EPS Growth NA 238.7 130.7 164.5 6.0Other liabilities 21 26 71 194 226

Summary Earnings Table

Revenue 85 87 139 389 453 Margins (%)EBIT DA -1 2 22 61 62 EBITDA Margin -1.5 2.2 15.7 15.7 13.6Net profit 1 3 15 39 41 PBT Margin 1.5 3.2 12.1 11.8 10.8P/E (x) 313.1 92.4 40.1 15.2 14.3 PATMI 0.9 3.1 10.5 10.0 9.1BV / share 0.6 0.7 0.5 0.9 1.1P/BV (x) 3.6 3.5 4.4 2.4 2.1ROA (%) 0.7 2.3 8.4 11.3 10.3ROE (%) 1.1 3.7 10.9 16.0 14.5

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18 August 2014

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Equity rating definitions BUY Positive recommendation of stock under coverage. Expected absolute return of more than +10% over 12-months, with low risk of sustained downside. TRADING BUY Positive recommendation of stock not under coverage. Expected absolute return of more than +10% over 6-months. Situational or arbitrage trading opportunity. HOLD Neutral recommendation of stock under coverage. Expected absolute return between -10% and +10% over 12-months, with low risk of sustained downside. TRADING SELL Negative recommendation of stock not under coverage. Expected absolute return of less than -10% over 6-months. Situational or arbitrage trading opportunity. SELL Negative recommendation of stock under coverage. High risk of negative absolute return of more than -10% over 12-months. NOT RATED No research coverage, and report is intended purely for informational purposes.

Industry rating definitions OVERWEIGHT The sector, based on weighted market capitalization, is expected to have absolute return of more than +5% over 12-months. NEUTRAL The sector, based on weighted market capitalization, is expected to have absolute return between –5% and +5% over 12-months. UNDERWEIGHT The sector, based on weighted market capitalization, is expected to have absolute return of less than –5% over 12-months.