News

• WASEONG has been awarded a subcontract by Schneider Electric France SAS, valued at US$41.2m (equivalent to RM166.7m based on the exchange rate of USD1.00 to RM4.0416) for the design and build up of seven (7) Pre- Fabricated Area Sub-Stations for a project in Kazakhstan. The activity is expected to commence in the third quarter of 2016 and be completed by 31 December 2018.

• The subcontract is for the provision of engineering, design, fabrication and construction services for the oil and gas industry which are within the business scope of WSC Group. The risks are normal operational risks associated with the said business.

Financial Impact

• Assuming a conservative PBT margin of 10%, financial impact to the group is estimated to at RM16.7m spanning 2 years and 3 months.

• This is deemed within expectations as the contract size is rather small to warrant a further upgrade on the group’s orderbook replenishment assumption.

Pros/Cons

• The latest tenderbook is about RM5bn largely concentrated on O&G jobs.

• Recent contract winning spree by the group has reversed the fortune and our view on the company with its orderbook to be potentially boosted significantly post the signing of Nord Stream 2 pipe mega project.

• Our channel checks reveal that the group is currently in negotiation with its client on the final details of the contract. Official signing of the contract could be done in the next few weeks.

• Its associates comprising of Alam Maritime JV and Petra Energy continue to be a drag on its earnings due to slowdown in activities.

• Plantation business in Congo remains a drag to its earnings and 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

• Earnings forecast maintained.

Rating

• Buy

• Positives –
• Stronger than expected contract replenishment ability showcasing its pipe coating prowess in the O&G industry globally.
• Negatives –
• Acquisition fuelled growth - volatile in downturns.
• Margin erosion risk on O&G jobs.

Valuation

• Our TP is maintained at RM1.00 based on unchanged 9x FY17 PER. Its job winning momentum could be sustained through next year whereby oil prices are expected to improve due to narrowing of oil supply growth. Maintain BUY.

Source: Hong Leong Investment Bank Research - 5 Aug 2016