Maintain buy at RM2.50 with target price of RM3.40: It was announced early yesterday that the board of directors of Socotherm SpA has accepted an offer for a share capital investment from an investor group consisting of ShawCor Ltd of Toronto, Canada and two private equity firms — France’s 4D Global Energy Advisors of Paris and Argentina’s Sophia Capital of Buenos Aires.

Completion of the share capital investment will result in the investor group attaining a 95% ownership interest in Socotherm with ShawCor Ltd holding a 40% interest in the investor group.

ShawCor’s investment will be approximately €30 million (RM118.88 million) (the full investment being €75 million). The completion of the investment is subject to a number of conditions, including approval of the Italian court supervising Socotherm’s restructuring process as well as the approval of Socotherm’s creditors.

We had indicated that there would be a strong possibility that Bredero Shaw may instead get the stake in Socotherm given their financial muscle and market positioning. Besides that, the tie-up with the two private equity funds may have bolstered their case.
Again, we view the loss in getting Socotherm as only a minor setback for Wah Seong. The group had never promised a positive outcome for the bid but only indicated that they were bidding.

With RM471 million cash sitting in its books, we don’t doubt that Wah Seong will still be looking for other avenues into new markets. We expect the company to make an announcement on the progress into Nigeria soon and this essentially also frees it up to look for other acquisitions.

We also view that with Bredero Shaw operating as a monopoly in some markets, Wah Seong could have a preference for entry as clients would want to keep the market competitive. As such, we see the possibility of the group getting tender invitations.

The market will no doubt take this news negatively and we view that any share price weakness is a good time to buy into Wah Seong.

We continue to like Wah Seong for its operational strengths as well as solid order book and track record. We maintain our buy call on the stock with target price of RM3.40. This is based on 20 times PE (price-to-earnings) (historical average) pegging FY10 EPS (earnings per share). — ECM Libra Investment Research, May 19