Wah Seong via its wholly owned subsidiary Wasco Coatings Ltd, announced that it has entered into a shareholders agreement with Medgulf Construction Company to setup a JV company (60% Wah Seong; 40% Medgulf) for the purpose of combining their expertise in the provision of anti-corrosion and concrete weight coating pipelines to the oil & gas industry in Qatar.

HLIB’s VIEW

Qatar facility. We are positive on this news flow as it crystalizes Wah Seong’s prospects as a going concern post Nordstream 2. We understand that this JV will undertake work for Qatar petroleum’s Northfield expansion project over the next 3 years. Our channel check reveals that Qatar intends to increase its LNG production capacity from 77m to c.100m tons per year by 2024. In order to achieve this, a total of c.1200km of pipelines will need to be built. Although the announcement did not come with a contract award, we feel that this is the entrée to the main course, which should be awarded sooner than later. Nordstream 2 was a 2400km pipeline with a contract value of c.EUR600m-EUR700m (c.RM2.7bn); hence our pro-forma calculation implies that the Qatari JV co. can safely secure c.RM1.4bn over the 3 year period. This translates to an orderbook win of c.RM800m for Wah Seong on a standalone basis.

Riding Yinson. Wah Seong’s engineering segment has had a long history with FPSO asset owners. They have historically done work for Armada (TP RM0.44, BUY), Yinson (NR) and Modec for their topside modules. However contributions from the engineering segment were always eclipsed by the contributions from their pipe coating business. We understand that the fabrication work that they do for FPSO topside modules (electrification, water processing, electrification and flaring units etc.) account for c.10%-15% of the said FPSO’s capex value. Note that the capex for Marlim 2 FPSO amounts to c.USD1bn; thus assuming that Yinson awards the topside EPC work to Wah Seong, this implies that per FPSO topside module could result in an award of c.RM400m to Wah Seong. We understand that Yinson is bidding for 3 more FPSO charters (Pecan, PDB and Limbayung). Furthermore, Yinson mainly does the VLCC conversion in Singapore (Keppel and or Sembcorp) whilst Wah Seong has a 12ha yard in Batam. Mosaic theory implies that Wah Seong stands a very good chance to secure these jobs as Yinson secures more FPSO jobs moving forward.

Forecast. Raise FY20-21 earnings estimates by 18.2%-10.1%, as we factor in the accelerated crystallisation of its outstanding tenderbook of c.RM5.4bn (as at 2Q19) into our orderbook replenishment assumptions (from RM600m in FY20-21 to RM1bn).

Upgrade to BUY, TP: RM1.13. We are upgrading Wah Seong to a BUY with a higher TP of RM1.13 (from RM0.70) pegging it to a higher multiple of 12x (from 8x) a discount of 14% its domestic peers who are riding on the oil & gas upcycle (see Figure#1). We also take this opportunity to roll our valuation into FY20.

Source: Hong Leong Investment Bank Research - 23 Oct 2019