News

• Wah Seong’s Indonesian subsidiary, PT. Wasco Engineering Indonesia, has been awarded a contract by Siemens SAS for the design and build up of 3 substations including Heating, Ventilation and Air Conditioning (HVAC) for a project in Kazakhstan.
• Valued at US$24.2m (circa RM103.6m), the contract will commence in 3Q17 and will be completed by 30th October 2018. Financial Impact
• Announcement is a slight positive to the group.
• By imputing PBT margin of 5% (consistent with O&G margins), the whole contract will bring about RM5.2m PBT to the group, with the bulk of it expected to be recognised in FY18.
• The positive impact accounts for 4.9% of our FY18 PBT forecast.

Pros/Cons

• HVAC project execution should not be a major concern for the group given the manageable contract size and group’s track record in handling similar projects before this.
• Back in August 2016, the group has been awarded a RM166.7m project of similar nature (by Schneider Electric France SAS) and no major issue has been reported so far.
• The contract would help to utilize the group’s spare capacity of fabrication yard (10,000 MT/year total capacity) in Indonesia, which is running at 50% utilization at this juncture.
• To recap on its Nord Stream 2 project, its first pipe coating plant has commenced operations in Finland in 2Q17 servicing the Nord Stream 2 project (worth EUR 600m spanning over 3 years).
• By end-3Q17, 2nd plant in Germany will commence operations, further accelerating its revenue recognition for Nord Stream 2 contract.

Risks

• Project execution risk.
• Pipe coating contract margin risk.

Forecasts

• Earnings forecast for FY18/19 is raised by 4.9/4.4% after incorporating the contribution from the above substation HVAC project.

Rating

HOLD (↔)

• Nord Stream 2 mega project is expected to be major contribution to group in the next 3 year. While orderbook has risen significantly, project execution risk remains as a concern as Nord Stream 2 project possess high complexity and demanding logistical requirements.

Valuation

• TP is raised to RM0.91 (previously RM0.87) pegged to unchanged 10x FY18 PER.

Source: Hong Leong Investment Bank Research - 02 Aug 2017