Wah Seong (WSC) reported headline profit of RM2m in its 2QFY21 results, attributed mainly to the gain on disposal of a yard in Sabah. Stripping this and other exceptional items off, WSC reported core net loss of RM4.2m, taking its 1HFY21 numbers to a core net loss of RM2.1m. The results are below our and consensus estimates of a full year profit of RM38.5m and RM37.1m respectively. The poorer performance was mainly due to movement restrictions and stricter SOPs implemented locally which slowed project executions. Given the still-high COVID-19 infection rates, we are now expecting 3QFY21 to mirror the recent quarter’s performance with substantial pick-up in earnings only from 4QFY21 onwards. We cut FY21 estimates by 61% and an average of 16.9% for FY22/23. The Group’s outstanding orderbook improved to RM1.4bn from RM1.2bn in 1QFY21 nonetheless. Tenderbook remains at c. RM4bn with the immediate attention on the possible award from the Qatar North Field Expansion project. We maintain our Outperform rating with a revised TP of RM1.00 based on 12x FY22F EPS (from RM1.20 previously).

• Lower QoQ. While 2QFY21 revenue was relatively flat QoQ, bottom line slipped into the red with core net loss of RM4.2m against a core net profit of RM2.1m in 1QFY21. Gross profit margin dropped 6.2ppt to 10% due for two reasons, i) change of product mix as contributions were derived mostly from engineering and fabrication work which carries lower profit margins, and ii) movement restrictions and stricter SOPs implemented locally which slowed project executions.

• Growing orderbook. Despite the burn rate, its outstanding orderbook remains healthy at c. RM1.4bn, growing 15.7% from RM1.2bn in 1QFY21. Notable wins for this year include the USD39.4m contract in Gabon, Africa and USD35.9m contract for modules fabrication works in the United Kingdom. Should we include other smaller contracts, we estimate it has been replenishing around RM500m – RM550m worth of contracts to its orderbook. This suggests that activities are continuing, in line with progressive recovery in the sector.

• Outlook. Tenderbook remains substantial at RM4bn with significant award will likely from this quarter onwards. Qatar Petroleum’s LNG expansion project with value thought to be worth around ~RM250m for the first contract is expected to be awarded this quarter while the other two packages will take place in late 4Q 2021 and 1Q next year. We are of the view that job opportunities in Qatar remain substantial with an estimated USD300m worth of contracts up for grabs within 1 - 3 years. As for earnings, we expect it to improve from 4Q onwards with the execution of more pipe coating contracts.

Source: PublicInvest Research - 27 Aug 2021