Weida ... Feb10

S&P Results Review & Earnings Outlook
• Weida’s 3QFY10 (Mar) results were operationally below expectations, due largely to lower-than-expected margins from its traditional manufacturing business. Nevertheless, overall net profit for the quarter was bolstered by a lower-than-expected tax rate, as well as an exceptional gain of MYR3.2 mln from the disposal of the group’s investment in Mutiara Goodyear (MGD MK, MYR0.78, Not Ranked).

• Revenue in 3QFY10 was down 38% QoQ, as revenue in 2QFY10 was bolstered by higher parts supply contributions from the group’s Syrian water/wastewater project. We estimate revenue of about MYR25 mln from the project in 3QFY10 vs. MYR50 mln in 2QFY10.

• Group EBIT margin declined to 7.7% in 3QFY10 from 8.7% in 2QFY10. Operating margin from the works division picked up to about 12% from 7%, with improved yields on the Syrian project. Manufacturing margin, however, dropped to 3% from 14% in 2QFY10
due to a higher mix of pipes vs. water tanks (which carry better margins), as well as timing differences in terms of booking in costs incurred in the previous quarter.

• We raise our FY10 net profit forecast by 13% to factor in the exceptional gain. Our FY11 earnings forecast is largely unchanged.

Recommendation & Investment Risks
• On the back of improving prospects, undemanding valuations and decent yields, we upgrade our call on Weida to Buy from Hold, with a raised 12-month target price of MYR0.83 from MYR0.71.

• We continue to peg Weida’s valuations to that of its peers in the water sector. Our target price is raised in accordance with higher peer valuations and reflects a sector average PER of 6.8x (6.0x previously) and includes our projected DPS. Valuations are undemanding, with the stock presently trading at a prospective FY11 PER of 5.9x. Meanwhile, the prospective dividend yield of 5.9% is also decent.

• What is positive is the Government’s emphasis on rural development in East Malaysia, particularly with regard to the water sector, and we are beginning to see the Government allocations flow through in terms of awarded contracts. We expect Weida to be a prime beneficiary of pipe replacement/installation works as well as rural water infrastructure projects. Separately, we estimate a further MYR100 mln worth of unbilled works on the group’s Syrian project, which should be progressively booked in over the next financial year.

• Risks to our recommendation and target price include the fluctuation in raw material prices, which would have an impact on manufacturing margins. Meanwhile, further delays in the take-off of water/sewerage infrastructure works would hurt earnings.