Wah Seong reported 1Q20 core losses of -RM44.9m (vs. profit of RM14.5m QoQ, profit of RM19.1m YoY); the deviation stems from lower than expected revenue from their O&G segment which is facing timing delays in tender crystallization due to the ongoing downturn in the oil and gas sector. We maintain our SELL rating with a lower TP of RM0.57 (from RM0.66). Whilst we still continue to expect a strong flow of orderbook replenishment for the group especially from fabrications and engineering, these awards will probably see deferments. We take this opportunity to roll our valuation into FY21 as a result. Our TP is a function of FY21 EPS pegged to a PE of 8x.

Below expectations. Wah Seong reported 1Q20 results with revenue of RM326.7m (-24% QoQ, -52% YoY) and core losses of -RM44.9m (vs. profit of RM14.5m QoQ, profit of RM19.1m YoY). As such, the results came in below ours and consensus full year profit expectations of RM61.0m/RM70m in FY20. The deviation stems from lower than expected revenues from their O&G segment, which is facing timing delays in tender crystallization due to the ongoing downturn in the oil and gas sector. In deriving our core earnings, we adjusted for EI’s amounting to a net amount of RM0.5m (mainly consisting of impairments of RM9.0m, FX gains of RM6.4m and gain on disposal of PPE of RM1.9m)

QoQ. Wah Seong recorded core net loss of -RM44.9m after adjusting for the above mentioned EI’s. The main driver in its decline into losses from a position of profit stems from a reduction in revenue (-24% QoQ) due to lower levels of market activities in its core operating segments.

YoY. Revenue declined by 52% to RM326.7m in tandem with its orderbook depletion from O&G (O&G revenue declined by 72% YoY). Subsequently Wah Seong recorded a loss vs. a core net profit of RM19.1m YoY. 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 (-75% YoY) to RM1.9m due to business seasonality and business disruptions arising from the MCO.

Prospects. The current order book stands at RM900m as at 1Q20 (O&G accounting for 59%, whilst RE accounting for 36%). We understand that Wah Seong’s tender book stands at c.RM4.5bn. (vs. RM5.0bn in 4Q19). Based on its historical burn rate, management guided that Wah Seong has c.2-2.5 quarters of orderbook to execute before running on empty. Although Wah Seong remains a strong contender to bag pipe coating jobs from Australia/ Qatar and Engineering & fabrication works pertaining to FPSO topside module fabrication, the current market conditions will more than likely see these jobs being deferred. Management has initiated a cost optimization drive and will look to further optimize its cost structure as they ride through these tumultuous times.

Forecast. We adjust our FY20 earnings to a position of loss (from a profit of RM61.0m) as we factor in orderbook replenishment delays and existing orderbook execution delays arising from the MCO.

Maintain SELL, TP: RM0.57. We maintain our SELL rating with a lower TP of RM0.57 (from RM0.66). While we still continue to expect a strong flow of orderbook replenishment for the group especially from fabrications and engineering, these awards will probably see deferments. We take this opportunity to roll our valuation into FY21 as a result. Our TP is a function of FY21 EPS pegged to a PE of 8x.

Source: Hong Leong Investment Bank Research - 21 May 2020