Why I Like Wasco (A Lot)

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

NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

Cummings, Chin Nam & The Melbourne Cup

Tan Chin Nam is the patriach of IGB, and also controls Wah Seong. His passions besides business are horse racing and chess. Tan is the only Asian to have won the Melbourne Cup, one of the oldest and most prestigious races in the world. Indeed, he is the only horse owner to have won it three times till today. The Melbourne Cup is in the same league as the English Derby, America's Kentucky Derby and the Dubai Cup. But in folklore terms, the Melbourne Cup is the biggest race in the world full stop.

Twice in 1974 and 1975, it was with Think Big, a horse he co-shared with Malaysia's first Prime Minister Tunku Abdul Rahman in 1975 for his second win and the third was in 1996 with Saintly. The largest stake money he ever won was the 1996 Melbourne Cup - A$600,000. Tan has horses in Hong Kong, Australia, Singapore, Malaysia and elsewhere.

The Cup is so coveted that top stables and trainers have been sending their best horses on the long journey to Flemington year in, year out. So far, very few have succeeded. We still find the huge Godolphin stable and top trainers such as Luca Cumani and Adrian O'Brien trying to steal the Cup in recent times. The prize money is very good but its still not the richest race in the world.

His friendship with the most successful trainer for Melbourne Cups, Bart Cummings, is legendary. Bart has won an astounding 11 Melbourne Cups till today. Most are just happy to win one, two with a good horse, three with a freakish horse like Makybe Diva. But 11 is just out of this world. Bart Cummings wasn't the best Melbourne Cup trainer today, he earned that title years ago. Now at 81 years of age, the 12th win was just further confirmation of his greatness.

You would think that for a trainer who had won it 11 times in the past, and with a horse owner who has already won it 3 times, that their combination would bring in some support in the betting. Well no, Viewed, went out at a staggering 40-1 and won by a nose. Some things are just destined that way, you go out and run 3,200m and wins by a nose.

Does luck play a part, of course, but ability, knowledge, choosing your friends and business associates wisely, treating them as family, valuing relationships, be good at what you do... also pay a huge part. Tan Chin Nam deserves the joy in winning his 4th Melbourne Cup. The Ingham brothers with hundreds of horses have never even won one. You can throw millions into buying horses and never win one. Its just one of those things in life.

Malaysian horse racing is the pits, its corrupt and largely fixed. lts the biggest crock of shit in the world, and nobody is intent to try to fix it. Over the years there have been glimpses from horse racing world from Malaysia and Singapore which do us proud. One owner, one trainer, one horse. Tan Chin Nam is one savvy horse owner for sure. He has won numerous top races with his horses in the highly competitive Australian horse racing landscape. The other shining light has to be trainer Ivan Allan - in my view easily one of the top 5 trainers in the world for the last 50 years. If only he had better horses or was born in England or Japan, he would have accomplished even more. Ivan won all there is in Malaysia and Singapore, nearly died when he was shot by gangsters (I told you horse racing was very corrupt here), then went to the most competitive and professionally run place in HK racing and became champion trainer almost overnight for a few years, competing with the top few trainers in the world and topping them almost immediately. Ivan is now regarded as a huge hero among the betting public there even though he has retired. Now he still owns some racehorses and still bets, though its harder to make it count as he is now very wealthy.

The last shining light I remember was a horse called Jumbo Jet. He was a freak in the 70s, and if he had raced anywhere else, he would have been tops. After winning everything he did go to America to race there but had an injury. Now that was a true racehorse, our own Seabiscuit and Secretariat rolled into one.

Viewed's victory gave Cummings a 12th cup victory and, as he shuffled through the media scrum to greet his charge, the grand old man of the track was already talking of a 13th. Viewed earned A$3.3 million for its owner, Tan Chin Nam, and paid a whopping A$46.50 to those who follow the master rather than form.