Post meeting, we acknowledge that Wah Seong has the competitive edge to compete with the other main player, Bredero Shaw while management is bullish about the company’s prospect particularly in Australia, underpinned by its RM6bn tender. However, we reckon that share price may have downside risk in view of unexciting upcoming quarterly results coupled with dwindling order book as NS2 is approaching completion stage in FY19. Therefore, without changing our earnings estimates, we reiterate SELL rating on the counter with unchanged TP of RM0.65, pegging to 8x FY19 PER.

We Recently Met Up With Wah Seong With the Following Key Takeaways:

NS2 update. Wah Seong has recognised EUR500m revenue as of 4Q18, the remaining EUR100m will be recognised in 9M19. Subsequently, Wah Seong will have to negotiate the additional incentive with the client upon project closure based on several benchmarks that were agreed earlier on. While the management did not disclose the amount, we estimate the maximum amount for the additional payout for NS2 should not be more than 1% of the total contract value, i.e. EUR6m (RM27m) and is expected to be paid out by 4Q19.

Tender book. Its tender book remains the same as 3Q18 at c.RM6.0bn with no new award and tender over the quarter. Bulk of the tender book is from the O&G segment, which is coming from Australia, Europe, Africa and Malaysia. Management is particularly bullish on Australia’s prospect, underpinned by the total tender of RM2bn which includes project Scarborough, Barossa, Julimar and etc. Being one of the top two global players in the oligopolistic pipe-coating industry, Wah Seong, in our view, has the competitive edge to compete with the other competitor Bredero Shaw, a Canadian-based company. However, we do not expect strong contract flow in the next 6 months as any sizeable contract win would only materialise by end-2019.

Volatile quarterly earnings in FY19. Its current order book has fallen to RM1.1bn as of 4Q18 from RM1.6bn in 3Q18, of which 70% is from the O&G segment. While bulk of it is attributable to NS2, we are projecting weaker QoQ earnings in till 3Q19 and subsequently recover in 4Q19 if Wah Seong manages to secure the additional incentive for NS2 from the client. Note that the plant in Finland will be closed down and mobilised to either Malaysia or Qatar while the plant in Germany will be kept to tender for new jobs in Europe. Therefore, Wah Seong’s bottom line could be hit by fixed overhead and depreciation before new projects start to contribute meaningfully.

Forecast. We maintain our earnings estimates as we have imputed new win of RM500m-800m for FY19-20. Apart from that, we have also factored additional incentives for NS2 from the client.

Reiterate SELL, TP: RM0.65. We maintain SELL rating on the stock with unchanged TP of RM0.65 pegging to 8x FY19 PER. This is premised on the absence of sizeable new contract award in the near term coupled with dwindling order book as NS2 is approaching completion stage in FY19. While we believe Wah Seong is a competitive player in the pipe-coating industry, we reckon that share price may have downside risk in view of unexciting quarterly results.

Source: Hong Leong Investment Bank Research - 5 Apr 2019