News

• Wah Seong was awarded a pipe coating contract for US$39.5m or RM167m by StateOil.

• The contract involved coating of approximately 439km of pipes for Johan Sverdup Export Pipeline project. Financial Impact

• This contract win will increase O&G orderbook from RM458m to RM625m.

• We opined that the contract win will only sustain revenue going forward but not growth.

Pros/Cons

• We are positive on the contract win given it will help to sustain O&G revenue by one year given that O&G orderbook has surged from RM458m to RM625m.

• The latest tenderbook is about RM5bn (versus RM4.3bn in 2Q15) with 80% related to O&G jobs. In view of the low oil price and spending cut by E&P player, we are cautious on the orderbook replenishment rate. The current O&G orderbook of RM625m is a concern as it can only sustain for about a year.

• We also understand that around 92% of its borrowing is in US dollar but naturally hedged as its revenue is also denominated in US dollar. Potential exercise to spin off non O&G asset to unlock value might not materialize in the near term given current market sentiment.

Risks

• Political risk, Congo Oil Palm Plantation.
• Execution risk.

Forecasts

• Unchanged.

Rating

• Sell

Positives

• Strong balance sheet and acquisition record.

Negatives

• Acquisition fuelled growth - volatile in downturns.
• Capex burden developing Congo oil palm.

Valuation

• Given the challenging market outlook coupled with weakening results, we maintain Sell with unchanged TP of RM0.89 based on unchanged 9x FY16 P/E.

Source: Hong Leong Investment Bank Research - 7 Dec 2015