Wah Seong’s 9MFY18 core net profit of RM69m came below our/consensus expectations on weaker-than-expected JV and associate contribution. 9M18 core net profit improved by 41% mainly thanks to ramp up of Nord Stream 2 pipe coating contract. That said, orderbook has fallen 18% QoQ to RM1.6bn (c.78% from O&G) while tenderbook remains flattish RM5.9bn including jobs from Europe, Africa and Australia. Slashed FY18/19/20 earnings by 13%/21%/26% respectively following earnings disappointment. Maintain HOLD rating with lower TP of RM0.81 pegged to 9x FY19 PER.

Below expectations. 9M18 core net profit of RM69.0 came below our/consensus expectations, accounting for 65% of HLIB and 67% of consensus estimates. The negative deviation is mainly due to weaker-than-expected JV and associate contribution.

QoQ: Core net profit decreased 15% QoQ to RM21.9m mainly due to higher tax expenses (+1.1x) and weaker performance from industrial trading segment (-64%). This was cushioned by stronger contribution from O&G (+8%) and renewable divisions (+41%).

YoY: Core net profit also dropped 35% YoY no thanks to weaker O&G (-25%; lower activities in Malaysian operations) masking better renewable segment (+2.4x) and turnaround of industrial trading segment led by better contribution from construction equipment and HDPE pipe manufacturing.

YTD: 9M18 core net profit improved by 41% as a results of better O&G segment (+74%; ramp up of Nord Stream 2 pipe coating contract), industrial trading segment (+33%) and turnaround of industrial trading division. This was partially offset by weaker JV & associate contribution which slipped into RM10.4m losses from RM2.7m profit in 9M17.

Nord Stream 2. We understand that completion rate of NS2 contract stood at c.65- 70% as of 3Q18. 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 result 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 has fallen to RM1.6bn as of 3Q18 from RM1.9bn in 2Q18, of which 78% 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 remains the same as 2Q18 at c.RM5.9bn with no new award and tender over the quarter. 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. We expect slower contract flow in the next 6-9 months as any sizeable contract win would only materialise beyond mid-2019.

Forecast. Slashed FY18/19/20 earnings by 13%/21%/26% respectively after imputing lower contribution from JV & association contribution and revenue recognition from O&G segment in view of slower contract flow in 2019.

Maintain HOLD, TP: RM0.81. Maintained HOLD with lower TP of RM0.81 (from RM1.26 previously) pegged to lower FY19 PER of 9x (from 11x previously) in view of absence of sizeable new contract award in the near term coupled with dwindling orderbook as NS2 approaching completion stage in FY19.

Source: Hong Leong Investment Bank Research - 28 Nov 2018