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Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Fri, 15 Nov 2019, 10:29 AM

 

Wah Seong Corporation - 2Q19 Weaker Results Overall

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We deem 1H19 results to be broadly within expectations, in anticipation of a weaker 2H19 due to upcoming jobs completion. Nonetheless, the results were overall weaker, dragged by jobs completion for its O&G segment. Overall, with major job wins expected to come in only in late-2019 or 2020, earnings outlook for the next 12 months seems momentarily bleak. However, upgrade to MP with TP of RM0.62, given recent share price weakness.

Broadly within expectations. 1H19 core net profit of RM32.4m (arrived after stripping-off non-core items, e.g. forex and impairments) came in at 63% of our full-year earnings forecasts. Nonetheless, we deem this to be broadly within our expectations as we anticipate a weaker 2H19 due to jobs completion, particularly the Nord Stream 2 project, which is expected to be completed in 3Q19. However, 1H19 came in at 50% of consensus full year forecasts. We believe the market could have possibly imputed in project execution from immediate new wins throughout the year, although we believe contributions from these would not be overly significant. No dividends were declared, as expected.

Poorer results overall. Cumulatively, 1H19 plunged 31% YoY, dragged by poorer oil and gas segment (-31%) due to work completions, partially offset by stronger renewable energy segment (+30%) from higher contributions from process equipment fabrication and boiler businesses. For 2Q19, core net profit of RM13.5m plunged 49% YoY, dragged by works completion in the oil and gas segment, coupled with lower margin mix works in renewable energy. Sequentially, core net profit deteriorated 28% QoQ from poorer oil and gas segment due to jobs completion, while its renewable energy segment stayed relatively flattish.

Weaker 2H19 expected. Given its expected dwindling order-book (currently at RM938.1m), we believe earnings may have momentarily peaked, and could start to suffer a gradual decline trend for the next 1-2 years. We expect major new wins to be secured only in late-2019 or even 2020, backed by its tender-book at ~RM5-6b, with project execution most likely to commence only in 2021. Key markets the company is tendering for include Australia and Africa, albeit with margins competition still likely.

Upgrade to MARKET PERFORM, given recent share price weakness of late having fairly priced-in foreseeable negatives, with an unchanged TP of RM0.62, pegged to “floor valuations” of 0.5x PBV on FY20E at - 2S.D (from its mean of 1x PBV). Our TP also implies forward PER of 9x - somewhat in line with its 2-year average. No changes were made to our FY19-20E numbers post-results.

Risks to our call include: (i) sooner-than-expected order-book or tender-book replenishment, (ii) stronger-than-expected order book recognition, and (iii) better-than-expected margins.

Source: Kenanga Research - 3 Sept 2019

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