Wah Seong reported 2Q20 core losses of -RM33.5m (QoQ: -RM44.9m, YoY: RM14.4m) and 1H20 core losses of -RM78.4m (1H19: RM33.4m). The results came in below our (FY20f: -RM57.7m) and consensus’ expectations (FY20f: RM10.4m) due to lower than expected contribution from its O&G segment. We believe that its current orderbook of RM870m would only be able to sustain its earnings for one year and we expect replenishment of orderbook to be low until the end of FY21. Core losses were derived after adjusting for i) net impairments (+RM1.1m) ii) gain on disposal of PPE (-RM5.6m) iii) Forex losses (+RM0.8m). We maintain our SELL rating with a lower TP of RM0.33 (from RM0.38) based on 0.3x FY20 BVPS in view of its subdued prospects. We do not foresee a material recovery for the Company until the end of FY21.

Below expectations. Wah Seong reported 2Q20 results with revenue of RM243.1m (- 26% QoQ, -68% YoY) and core losses of -RM33.5m (QoQ: -RM44.9m, YoY: RM14.4m), bringing 1H20 core losses to -RM78.4m (1H19: RM33.4m) The results came in below ours (FY20f: -RM57.7m) and consensus’ (RM10.4m) expectations. 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 RM3.8m. No dividends were declared for the quarter, none expected for the year.

QoQ. Wah Seong recorded core net loss of -RM33.5m (QoQ: -RM44.9m) after adjusting for the above mentioned EI’s. The lower QoQ losses recorded were attributable to its cost-cutting measures.

YoY. Revenue declined to RM243.1m (-68% YoY) in tandem with its orderbook depletion from O&G. Subsequently Wah Seong recorded a core loss of -RM33.5m (YoY: RM14.4m). Its O&G segment posted losses of -RM25.3m (YoY: RM23.7m) at the operating level in tandem with the winding down of NS2 and minimal orderbook replenishment. The Renewable energy segment recorded a drop in profitability (-26% YoY) to RM5.5m due to business seasonality and business disruptions arising from the MCO.

YTD. Core losses of -RM78.4m (1H19: RM33.4m) was particularly driven by lower revenue of RM569.9m (-60% YoY).

Prospects. The current order book stands at RM870m as at 2Q20 (O&G accounting for 61%, RE accounting for 34% whilst ITS accounting for 5%). We believe that the Company’s current orderbook could only cover revenue for 1 year. 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. Its c.RM1.5bn Qatar project has already been deferred to 4Q21 or 1Q22 (from 2Q21 previously) and we believe that this trend is expected to continue. Management has initiated a cost optimization drive but we believe that it would not be enough to circumvent its losses until the end of FY21.

Forecast. We adjust our FY20-21 earnings from -RM57.7m/RM18.3m to -RM130.3m/ -RM90.9m as we factor in orderbook replenishment delays and existing orderbook execution delays arising from the oil price crash and Covid-19.

Maintain SELL, TP: RM0.33. We maintain our SELL rating with a lower TP of RM0.33 (from RM0.38) based on 0.3x FY20 BVPS. Pipe coating jobs of material size are usually hard to come by and we believe that the Covid-19 pandemic has exacerbated the situation further.

Source: Hong Leong Investment Bank Research - 28 Aug 2020