Wah Seong’s 1HFY18 core net profit of RM47m was within our expectation but below consensus estimates. 1H18 core net profit surged 2.1x thanks to ramp up of Nord Stream 2 pipe coating contract and higher contribution from industrial trading segment. Orderbook stood at RM1.93bn (c.82% from O&G) while tenderbook worth RM5.9bn including jobs from Europe, Africa and Australia. With no changes in estimates, maintain our HOLD rating with unchanged TP of RM1.26 pegged to 11x FY19 PER.

Results within HLIB estimates but below consensus. 1H18 core net profit came in at RM47.1m, accounting for 45% of HLIB and 41% of consensus estimates.

QoQ: Core net profit increased 22% to RM25.9m mainly due to higher contribution from O&G (23%) and renewable divisions (+1.0x), partially offset by weaker performance from industrial trading segment (-51%).

YoY: Core net profit surged by 1.8x due to stronger O&G (+2.8x; ramp up of Nord Stream 2 pipe coating contract) and turnaround of industrial trading segment led by better contribution from construction equipment and HDPE pipe manufacturing.

YTD: 1H18 core net profit also jumped by 2.1x as a results of better O&G segment (+7.4x; NS2 led) and industrial trading segments masking weaker renewable energy division (-15%; margin compression in process equipment and steam turbines).

Nord Stream 2. We understand that completion rate of NS2 contract stood at c.50% as of 2Q18. To recap, NS2 contract is worth RM3bn and is expected to complete in 3Q19. Meanwhile, as there is talk about re-routing of NS2 project which may results in additional pipes, management highlighted that the alternative route is not confirmed and additional quantum may not be significant if any.

Order book. Its current order book stands at RM1.9bn, of which 82% is from O&G segment. NS2 takes up significant portion of its order book and cost management of the project is essential to the group’s profitability.

Tender book. Its tender book is at c.RM5.9bn, slight increase from RM5.8bn in 1Q18. Bulk of the tender book is from the O&G segment, which can potentially help to sustain revenue momentum beyond 2019 upon expiry of NS2 project.

Outlook. Despite Trans Sabah Gas Pipeline being cancelled by the government, management is seeking to secure more projects from overseas such as Europe, Africa and Australia. However, we expect slower contract flow in the next 6-9 months as any sizeable contract win would only materialise beyond mid-2019.

Forecast. Unchanged.

Maintain HOLD, TP: RM1.26. Maintained HOLD with unchanged TP of RM1.26 pegged to unchanged 11x FY19 PER as near term solid results will be offset by orderbook replenishment concern beyond NS2.

Source: Hong Leong Investment Bank Research - 3 Sept 2018