Post conference call, we are positively surprised by Wah Seong’s ability to secure multiple small O&G related works in 1Q19 to offset the decline of outstanding orders from Nord Stream 2. Additionally, management reiterated their bullish stance on future prospect particularly in Australia, which could come in soonest by end-2019. Increased our FY19/20/21 earnings by +8%/+14%/+13% on higher replenishments. Following that, we upgrade the counter to HOLD rating with higher TP of RM0.70 (from RM0.65) pegged to unchanged 8x FY19 PER.

Nord Stream 2 update. Wah Seong has recognised RM308m revenue from Nord Stream 2 project in 1Q19 to achieve 92% completion rate. The remaining >200m (20% of its existing order book) will be recognised in 2Q-3Q19. Wah Seong will then only start to negotiate the additional incentive with the client upon project closure based on several benchmarks that were agreed earlier on. We estimate that 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 4Q19/1Q20.

New smallish jobs in 1Q19. The current order book still stood at RM1.09bn as of 1Q19, a slight drop from RM1.11bn level as of 4Q18. Based on our back of envelope calculation, this implies that the O&G segment has secured c.RM370m worth of new contracts, which were undisclosed during the quarter. These contracts consist of local pipe coating works, additional pipe manufacturing orders and maintenance work in Australia. Management highlighted that activities are picking up and do not discount the possibility of more small projects going forward. Cumulatively, these wins are estimated to account for 74% of our current orderbook replenishment assumption in FY19.

Tender book. Its tender book remains the same as 3Q18 at c.RM6.0bn. Bulk of the tender book is from the O&G segment, which is coming from Australia, Europe, Africa and Malaysia. Management reiterated their bullish stance on Australia’s prospect, underpinned by the total tender of RM2bn which includes projects such as Scarborough, Barossa and Julimar. In our view, while Wah Seong, has the competitive edge to compete with the other competitor Bredero Shaw, the new round of contract flows would only kick in by end-2019.

Forecast. Taking into consideration of the contracts secured in 1Q19, we decided to lift our FY19 annual replenishment to RM800m from current RM500m level as we believe Wah Seong is capable to secure more jobs towards end-2019. Following that, our FY19/20/21 earnings are adjusted +8%/+14%/+13% accordingly.

Upgrade to HOLD, TP: RM0.70. Post earnings adjustment, we increased our TP to RM0.70 (from RM0.65 previously) pegging to unchanged 8x FY19 PER. Share price have retraced 21% since our downgrade in Feb, making current levels more palatable from a risk to reward stand point. All in all, we upgrade our rating on the counter to HOLD from Sell.

Source: Hong Leong Investment Bank Research - 15 May 2019