Wah Seong reported 2Q19 core earnings of RM14.4m (-25% QoQ, -45% YoY); this brought 1H19 core earnings of RM33.4m (-29% YoY). At 49.6%/51.5% of ours and consensus full year estimates, we deem the results to be within expectations. We maintain HOLD rating on the stock with unchanged TP of RM0.70. We see limited downside risk to the stock and risk reward being more favourable given that the market has priced in the completion of NS2 whilst awaiting the crystallization of its tenders.

Within expectations. Wah Seong reported 2Q19 results with revenue of RM757.4m (+11% QoQ, +0% YoY) and core earnings of RM14.4m (-25% QoQ, -45% YoY); this brought 1H19 core earnings of RM33.4m (-29% YoY). At 49.6%/51.5% of ours and consensus full year estimates, we deem the results to be within expectations. No dividend was declared, as expected.

QoQ. Wah Seong recorded core net profit of RM14.4m after adjusting for exceptional items such as RM2.6m reversal of inventory impairment and RM3.0m forex gains. Core net profit declined by 25% QoQ (from RM19.1m) on lower other operating income (-83%) and higher finance costs (+27%) partially offset by a turnaround from its JV & associates which recorded a profit of RM3.5m.

YoY. Core net profit dropped by 45% YoY (from RM25.9m) due to weaker O&G (- 38%) contributions in tandem with the winding down of NS2 and industrial trading & services segment recording a small loss vs. a profit of RM3m at the EBIT level attributed to the slowdown from the construction sector.

YTD. Revenue of RM1.44bn (-7% YoY) translated into core net profits of RM33.4m (- 29%). The decline in earnings is due to lower contributions from the O&G segment compounded by a higher effective tax rate of 37% YoY (due to lower DTA recognised and the majority of earnings contributions coming from the EU which has a higher statutory tax rate).

Order book. The current order book stands at RM938m as of 2Q19 (from RM1.09bn in 1Q19). 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 also understand that Nord Stream 2 project takes up c.20%+ of its outstanding order book; management indicated that moving forward there will be some costs saving elements from man power as Nordstream 2 winds down.

Tender book. Wah Seong’s tender book has reduced to c.RM5.4bn (from c.RM6.0bn) on the crystallization of some smaller contract in the quarter. Bulk of the tender book is from the O&G segment, which is coming from Australia, Europe, Africa and Malaysia. Management reiterated their 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/early 2020.

Forecast. Unchanged.

Reiterate HOLD, TP: RM0.70. We maintain HOLD rating on the stock with unchanged TP of RM0.70 pegging to 8x FY19 PER. This is premised upon contained downside risk to the stock and risk reward being more favourable given that the market has priced in the completion of NS2 whilst awaiting the crystallization of its tenders.

Source: Hong Leong Investment Bank Research - 3 Sept 2019