Wah Seong reported FY19 core earnings of RM62.6m (-18% YoY). We deem the results to be within expectations. We keep our FY20-21 earnings in anticipation of strong flow of orderbook replenishment from fabrications and engineering. We downgrade to a SELL rating (from HOLD) as the stock has run up far ahead of the crystallization of its tenders. Maintain our TP of RM1.13 pegging to 12x FY20 PE.

Inline. Wah Seong reported 4Q19 results with revenue of RM429.3m (-33% QoQ, - 39% YoY) and core earnings of RM14.5m (-2% QoQ, +86% YoY); this brought FY19 core earnings of RM62.6m (-18% YoY). At 103%/100% of ours and consensus full year estimates, we deem the results to be within expectations. The weaker QoQ numbers are not surprising as we had expected a sequentially weaker 4Q19. Surprisingly, a dividend of 1 sen/share was declared comprising of (i) cash dividend of 0.4 sen/share and (ii) share dividend on the basis of 1:200 (equivalent value of gross share dividend of 0.6 sen/ share based on the closing share price.

QoQ. Wah Seong recorded core net profit of RM14.5m after adjusting for EIs amounting to a net value of RM45.1m (consisting mainly of (i) an impairment of RM34.7m from its NS2 plant and equipment, (ii) RM18m impairment from its JV asset – Alam vessel and (iii) RM6.9m from gain on disposal of property).

YoY. Revenue declined by 39% to RM429.3m in tandem with its orderbook depletion from O&G. Core net profit improved by 86% YoY (from RM7.8m) namely due to the positive tax of RM30.6m vs. -RM16.0m YoY and after adjusting for EI (namely the RM34.7m impairment from NS2 assets which skewed the figures). Its O&G posted losses at the operating level in tandem with the winding down of NS2 and the subsequent impairments. The Renewable energy segment recorded a drop in profitability (-31% YoY) to RM4.8m due to unanticipated cost overruns from a project in the boiler business.

YTD. Revenue of RM2.5bn (-15% YoY) translated into core net profits of RM62.6m (- 18%). 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 40% YoY (due to WC requirements and project financing requirements). The softer earnings are a reflection of the timing difference between orderbook replenishment and job executions.

Prospects. The current order book stands at RM929.6m as of 4Q19 (O&G accounting for RM576.7m, whilst RE accounting for RM309.3m). Whilst Wah Seong’s tender book stands at c.RM5.0bn. (RM4.5bn from O&G), it remains a strong contender to bag c.USD200m worth of jobs in the coming months.

Forecast. We are keeping our FY20-21 earnings intact as the results are within expectations.

Downgrade to SELL, TP: RM1.13. We take this opportunity to downgrade to a SELL rating (from HOLD) as the stock has run up far ahead of the tender crystallization. The share price has run up 41% since our BUY upgrade in Oct (we subsequently downgraded to HOLD in Nov). Nonetheless, we continue to expect a strong flow of orderbook replenishment in the coming months especially from fabrications and engineering. Maintain our TP of RM1.13 pegging to 12x FY20 PE.

Source: Hong Leong Investment Bank Research - 19 Feb 2020