Wah Seong reported 3Q19 results with revenue of RM644.5m (-15% QoQ, -8% YoY) and core earnings of RM15.8m (+10% QoQ, -28% YoY); this brought 9M19 core earnings of RM49.3m (-29% YoY). At 73% of our full year estimates, the results are slightly below expectations; in anticipation of a sequentially weaker 4Q19. We downgrade to a HOLD rating (from Buy) as the stock has run up by 31.2% since our upgrade mid-Oct. Maintain our TP of RM1.13 pegging to 12x FY20 PE.

A slight miss. Wah Seong reported 3Q19 results with revenue of RM644.5m (-15% QoQ, -8% YoY) and core earnings of RM15.8m (+10% QoQ, -28% YoY); this brought 9M19 core earnings of RM48.1m (-30% YoY). At 73% of our full year estimates, we deem the results to be slightly below expectations; in anticipation of a sequentially weaker 4Q19. No dividend was declared, as expected.

QoQ. Wah Seong recorded core net profit of RM14.7m after adjusting for EIs amounting to a net value of RM563k (consisting mainly of a RM720k reversal of inventory impairment and RM158k forex loss). Core net profit improved by 2% QoQ (from RM14.4m) on lower finance costs (-29%) boosted by a turnaround from its JV & associates which recorded a profit of RM6.1m (from RM3.5m +73% QoQ – namely from Petra Energy in which they recognised c.RM6.7m in the current quarter).

YoY. Core net profit dropped by 33% YoY (from RM21.9m) due to weaker O&G (- 50.4%) contributions in tandem with the winding down of NS2 and its Renewable energy segment recording a drop in profitability (-46% YoY) to RM5.9m due to unanticipated cost overruns from a project in the boiler business.

YTD. Revenue of RM2.1bn (-7% YoY) translated into core net profits of RM48.1m (- 30%). The decline in earnings is due to lower contributions from the O&G segment and industrial trading (due to general slowdown in the construction sector) compounded by higher finance costs of 28% YoY (due to WC requirements and project financing requirements).

Prospects. The current order book stands at RM969m as of 3Q19 (from RM938m QoQ). The marginally higher orderbook is a function of small job wins from pipe coating and engineering. We understand that Nord Stream 2 project takes up c.10%+ of its outstanding order book- namely logistics portion of the contract. Wah Seong’s tender book stands at c.RM5.4bn of which c.RM4.8bn are from the oil and gas segment. We are made to understand that there is c.USD200m worth of jobs to be awarded in the coming months (end-2019/early 2020).

Forecast. Post earnings evaluation we reduce our FY19 earnings by 10% as we account for the depletion of the NS2 orderbook and a softer 4Q19 due to timing differences between job executions. However we keep our FY20-21 earnings intact in anticipation of a strong flow of orderbook replenishment in the coming months from the rejuvenated O&G sector.

Downgrade to HOLD, TP: RM1.13. We downgrade to a HOLD rating (from Buy) as the stock has run up by 31.2% since our upgrade mid-Oct. Maintain our TP of RM1.13 pegging to 12x FY20 PE. We feel the market has priced in the crystallisation of its tenders from Engineering (Yinson) and Pipelines (Qatar & Australia) at this juncture in light of the expected softer 4Q19.

Source: Hong Leong Investment Bank Research - 22 Nov 2019