WAH Seong Corp Bhd’s existing valuations and fundamentals are apt to initiate an upgrade in the oil and gas (O&G) services company’s financial estimates against the backdrop of an improving broader landscape.

In a note, ECM Libra Research said it had revised upwards its target price for Wah Seong shares by 48.1% to RM2.40 from RM1.62. The stock is now rated a buy at RM1.98, up from hold previously, following a sector upgrade to overweight.

“We have made only a minimal 2% tweak to earnings (for Wah Seong) in this update. Any delays in the award of contracts would pose the biggest risk to Wah Seong now. Should they not be awarded any jobs by year-end, there is a possibility that 2010 earnings will be hit.

“Other than that, given the stock’s high correlation with the KLCI and not crude oil prices, a selldown in the market would most certainly impact Wah Seong,” ECM Libra said.

Wah Seong’s revised target price of RM2.40 was derived from a price-earnings-based (PE) valuation of 16.4 times which is the average PE ratio the stock was trading between January 2007 and June 2009. That is 34.4% below the over 25 times peak PE valuation for the firm.

ECM Libra said average valuations for Wah Seong which has an order book of RM1.3 billion, was apt as the firm had yet to see major contract flows, and also because future jobs were likely to be smaller-scale  initiatives.

The research firm said it expected pipe-coating and pipe-making projects to drive the O&G services group’s earnings in the current financial year ending Dec 31. At the same time, mergers and acquisitions are also anticipated to spur the company’s expansion.

“In fact, they were the only company to beat our estimates from our coverage. Looking into the balance sheet, Wah Seong has a very manageable net gearing of 0.6 time, healthy cash balance of RM231 million (1Q09 results) and an efficient cash conversion cycle of 100 days.

“Besides that, they are still actively bidding for many pipeline jobs (O&G and also other industries like water) locally and abroad in Australia and are expecting awards before the year is out as well. Also, when offshore activity picks up, we see their gas compression business to pick up significantly as well,” ECM Libra said.

Wah Seong shares rose 1% or two sen to RM2 yesterday. The stock has gained 101% so far this year compared to the broader market’s 33.7% rise.