Highlights / Comments

• Since the announcement of contract for the Nord Stream 2 concrete weight coating project, we have gathered more information on the pipeline project and its implications and importance to the European energy security.

• The Nord Stream 2 pipeline project is an extension to the successful Nord Stream project which acts as the transport medium of natural gas from gas rich Russia across the Baltic Sea to Europe. Now, through the second mega project, the existing pipelines would be extended with 2 additional lines, further supplementing the gas transportation system.

• Referring to the Nord Stream 2 project factsheet, the total pipeline project cost amounts to circa EUR8bn, to be 30% funded through equity from shareholders and 70% via external project financing (debt financing). Justifications for the pipeline extension project include (i) high decline rate in Western Europe (EU and Norway) with 100bcm gas production required to be replaced until 2035, and (ii) demand would recover to 500 bcm by 2035 resulting in import gap of 140bcm.

• Shareholders agreement has been reached in Sept 2015 at Nord Stream 2 AG level. Currently survey and engineering works are ongoing until mid-2017. Construction of lines would be in 2018 and 2019 with commissioning targeted to be in end 2019. As for WASEONG, concrete weight coating is expected to commence in Sept 2016 spanning to 3Q 2019.

• Project size is unconfirmed at this juncture as final negotiations have yet to be done and official signing would be done soon. However, the previous Polarled project in Norway was worth US$198m, implying a contract value/km of USD0.38/km. Assuming a 30% discount to the contract value due to current downturn in O&G industry, the potential contract value for Nord Stream 2 project could fetch as high as USD731m (circa RM2.6bn), a huge boost to the group’s orderbook.

Risks

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

• Project execution risk.

Forecasts

• We raise our FY17 core net profit forecast by 56% to account for significantly higher O&G orderbook replenishment and higher margins due to economies of scale from higher-thanexpected work orders.

Rating

• Buy

• Positives - Relatively resilient pipe coating demand which is still essential form oilfield maintenance despite low oil prices.
• Negatives - Acquisition fuelled growth - volatile in downturns.

Valuation

• As a result of earnings upgrade, our TP is raised to RM1.00 from RM0.58 previously based on unchanged 9x FY17 PER. Nord Stream 2 project is expected to anchor the group’s earnings in the next 3 years.

Source: Hong Leong Investment Bank Research - 4 Aug 2016