Wah Seong’s 1Q19 core net profit of RM19m is deemed within expectations with the anticipation of weaker 2H19 following the completion of Nord Stream 2 project by 3Q19. 1Q19 earnings dropped by 10% YoY no thanks to weaker O&G and industrial trading & services segment. This masked better renewable energy segment which resulted from stronger steam turbine business. All in, we maintain our earnings estimates and maintain our SELL rating on the stock with unchanged TP of RM0.65 pegged to 8x FY19 PER.

Deemed within expectations. At 30%/28% of full year estimates, 1Q19 earnings of RM19.1m is deemed within our/consensus expectations as we anticipate weaker 2H19 following the completion of Nord Stream 2 project by 3Q19. No dividend was declared, as expected.

QoQ: Wah Seong recorded core net profit of RM19.1m after stripping off exceptional items such as RM3.8m reversal of receivables impairment, RM0.2m impairment on inventories and RM2.4m forex loss. Core net profit increased 1.5x QoQ as a result of narrowing losses from its JV & associates as well as stronger contribution from all three main segments.

YoY: Core net profit dropped by 10% YoY no thanks to weaker O&G (-21%; poorer Asia Pacific operations) and industrial trading & services segment. It was cushioned by improved contribution from renewable energy segment due to better profit margins from the steam turbine business.

Nord Stream 2. While pending more information from the conference call which will be held this morning, we believe that Nord Stream 2 completion would probably have exceeded 90% as of 1Q19. To recap, NS2 contract is worth RM3bn and is expected to complete in 3Q19.

Order book. The current order book still stood at RM1.09bn as of 1Q19, a slight drop from RM1.11bn level as of 4Q18. We understand that its pipe manufacturing unit and engineering division have secured several smallish jobs during the quarter to offset the decline in pipe coating business. We reckon that Nord Stream 2 project still takes up significant portion of its O&G outstanding order book and cost management of the project is essential to the group’s profitability.

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 projects such as 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.

Forecast. While maintaining our FY19-20 earnings estimates, FY21 earnings of RM59.6m (+10.4% YoY) are introduced based on RM800m annual contract replenishment.

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 Nord Stream 2 is approaching completion stage in FY19.

Source: Hong Leong Investment Bank Research - 14 May 2019