News

• WASEONG’s JV pipe coating bus iness unit, Bayou Was co Ins ulation, LLC (“Bayou Was co”), has been awarded a sub-contract valued at approximately US$74.0m for the provision of insulation coating protection for deep water, offshore insulation project in the Gulf of Mexico.

• Bayou Wasco is a joint venture between Wasco Coatings UK Ltd. (“Was co UK”), the Company’s indirect wholly-owned subsidiary and a s ubs idiary of Aegion Corporation (“Aegion”). Was co UK holds 49% equity interest in Bayou Wasco.

• The sub-contract work involves the provision of insulation coating protection for the deepwater portion of an undersea pipeline which is the core business of the WSC Group. The risks are the normal operational risks associated with provision of pipe coating and insulation services. Financial Impact

• This contract win will increase O&G orderbook from RM894m to circa RM1bn. Earnings impact would be felt in 3Q16 with contract tenure of circa 12 months.

• The relatively large contract win, in our opinion, represents a replenishment to sustain its O&G revenue base post the expiry of its major Polarled coating work worth RM611.3m in 2015 for Statoil.

Pros/Cons

• Contract win is a positive given it will help to sustain O&G revenue by another year, reducing earnings downside risk amid slow O&G industry activity.

• The latest tenderbook is about RM6.7bn largely concentrated on O&G jobs. In view of the low oil price and spending cut by E&P player, we remain cautious on the orderbook replenishment rate. On the other hand, profit margins would be weaker for its O&G pipe coating division amid cost rebasing by its clients to weather the downturn.

• Plantation business in Congo remains a drag to its earnings and is not expected to breakeven until 2018 as it is still going through gestation period for its young oil palm trees to mature.

Risks

• Political risk, Congo Oil Palm Plantation which is still in the early stage.
• Pipe coating contract margin risk.

Forecasts

• Unchanged.

Rating

• Hold

Positives

• Relatively resilient pipe coating demand which is still essential form oilfield maintenance despite low oil prices .

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 Hold with unchanged TP of RM0.79 based on unchanged 9x FY16 P/E.

Source: Hong Leong Investment Bank Research - 24 Mar 2016