PublicInvest Research

Author: PublicInvest   |   Latest post: Thu, 21 Nov 2019, 11:24 AM


Wah Seong Corporation Berhad - Future Earnings At Risk

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Wah Seong reported lower 2QFY19 revenue and core net profit of RM757.4m (-0.3% YoY) and RM14.2m (-44.4% YoY) respectively. For the cumulative 1HFY19, the Group’s revenue and core net profit was also lower, dropping by 7.2% and 27.4% YTD to RM1.4bn and RM33.2m respectively. The numbers were in line with our forecast however, meeting 53.9% and 51.5% of our and consensus full-year estimates respectively, with expectations that the earnings will deteriorate in the remaining quarters given the Nord Stream 2 (NS2) project coming to its tail-end with 100% completion by 3Q. We remain cautious over its earnings outlook given its fast-depleting order book which can only sustain the company for this financial year. Although the company has a sizeable tenderbook value of c. RM5.4bn, contract awards may only happen late in the year into the next. With significant contribution only in the next financial year at the earliest, if any, we trim FY20-21 forecast by 11.4% on average. Our TP is subsequently lowered to RM0.63 based on earnings multiple of 8x over its FY20F EPS of 7.8sen. The PER ascribed is justifiable given its unexciting near-term earnings outlook. Our Neutral call is also maintained.

  • Margin compressions in 2Q. Revenue for 1HFY19 dropped 7.2% YTD attributed to lower contribution from the Group’s oil & gas segment which recorded an 11.0% YTD decrease. This was mainly due to continued lower levels of activity in the Asia Pacific Region as well as the Nord Stream 2 as it approaches completion. Profit margins in 2Q also saw some compression by 1.2ppt as compared to 1QFY19’s 12.2% at gross level, likely due to change in product mix. 1HFY19 core net profit declined 27.4% YTD as a result.
  • Future earnings at risk. The Group’s major oil and gas project - NS2 which was valued at EUR600m is currently progressing at >90% with 100% completion very soon. Management’s previous guidance of securing projects from its sizable tenderbook of RM5.4bn (from RM6bn in the previous quarter) has still not borne fruit. Nevertheless, we notice that the Group has managed to secure multiple small-scale contracts during the 1H period with a combined value of c.RM750.5m with life span of 12-18 months, maintaining its outstanding orderbook at RM938.1m. We reckon the new wins are likely to have come from the engineering and pipe manufacturing unit as well as some supplementary book order from existing projects. Significant contract awards such as in Australia and Europe may happen later this year into the next, translating to significant contributions only in the next financial year at the earliest, if any. The Group’s near-term earnings outlook remains at risk.

Source: PublicInvest Research - 3 Sept 2019

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