News

• It is announced that WASEONG has secured contract for the provision of concrete weight coating and storing of more than 200,000 pipes for Nord Stream 2 Project by Nord Stream 2 AG. The contract for this award is subject to final negotiations and will be signed in the coming weeks. WSC will announce the project value once the final negotiations are completed and contract is signed.

• The award involves concrete weight coating and storing of approximately 2,400 km of pipes. The project is expected to commence in September 2016 and be completed by third quarter of 2019.

Financial Impact

• Financial impact is difficult to ascertain at this juncture as the contract value is not disclosed for the time being.

• However, if we refer to its previous pipe coating Polarled project in Norway, the contract was worth RM605m involving 520km of pipes, 4x smaller than the Nord Stream 2 project.

• Therefore, we opine that the contract value of the recent new win would be significantly larger than the Polarled project.

Pros/Cons

• Cont ract win is a big positive given it will help to boost the group’s orderbook signi ficantly gi vi ng better visibility on its future earnings.

• The latest tenderbook is about RM5bn 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 plan oil trees to mature.

Risks

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

• Pipe coating contract margin risk.

Forecasts

• We increase our FY17 core net profit forecast by 38.9% to account for significantly higher orderbook replenishment in the wake of the recent big job win.

Rating

• Sell

• 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

• As a result of earnings upgrade, our TP is increased to RM0.58 from RM0.49 previously based on unchanged 9x FY17 PER. While recent big win is a positive, margin compression is still a concern and its JVs focused on O&G asset business would still be a drag.

Source: Hong Leong Investment Bank Research - 12 Jul 2016