Wah Seong reported 9M20 core losses of -RM69.0m (9M19: RM48.1m) which was above our (FY20f: -RM130.3m) and consensus’ expectations (-RM112.8m) due to (i) higher than expected work orders secured in 3Q20 after a sluggish 2Q20 due to MCO and (ii) implementation of additional cost savings measures. We expect 4Q20 profit to come in weaker QoQ when work activity normalises. Despite the positive results, we believe that its current orderbook of RM1.1bn would only be able to sustain its earnings for one year and we expect replenishment of orderbook to be low until FY21. Revise FY20/21 net loss forecast from -RM130.3m/-RM90.9m previously to -RM93.1m/-RM68.5m. We maintain our SELL rating with a TP of RM0.33 (0.3x FY20 BVPS).

Above expectations. Core profit of RM9.4m (QoQ: -RM33.5m, YoY: -36%) and 9M20 core losses of -RM69.0m (9M19: RM48.1m) were above ours (FY20f: - RM130.3m) and consensus’ (-RM112.8m) expectations. In deriving our core earnings for 9M20, we adjusted for EI’s amounting to a net amount of RM260.9m. The positive results surprise was due to (i) higher than expected work orders secured in 3Q20 after a sluggish 2Q20 due to MCO and (ii) implementation of additional cost savings measures. We expect 4Q20 profit to come in weaker QoQ when work activity normalises. No dividends were declared for the quarter, none expected for the year.

QoQ. Wah Seong recorded core profit of RM9.4m (QoQ: -RM44.9m) after adjusting for the above mentioned EI’s. The better QoQ performance was mainly attributable to higher O&G revenue of RM221.7m (+184%) after a lacklustre 2Q20 due to Covid-19.

YoY. Revenue declined to RM453.3m (-30% YoY) in tandem with its orderbook depletion from O&G. Subsequently Wah Seong recorded a core profit of RM9.4m (- 36%). Its O&G segment posted losses of -RM232.9m (YoY: RM20.5m) at the operating level due to impairments and provisions amounting to RM249m. Excluding impairments, O&G segment earnings would stand at RM16.1m (-21.5%). The lower O&G profit (excluding EIs) was in tandem with the absence of NS2 contribution and minimal orderbook replenishment.

YTD. Core losses of -RM69.0m (9M19: RM48.1m) was particularly driven by lower revenue of RM1,023.2m (-51% YoY) due to lower O&G orderbook backlog.

Prospects. Current order book stands at RM1.1bn as at 3Q20 (O&G: 73%, RE: 23%, ITS: 4%). 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. We also believe that the pipe coating contract which was supposed to be dished out previously from Qatar (NFPS) has also shrunk in value and size in view of unfavourable economic conditions. 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 despite its better 3Q20 performance.

Forecast. We revise FY20/21 net loss forecast from -RM130.3m/-RM90.9m to - RM93.1m/-RM68.5m in view of its better than expected 3Q20 performance.

Maintain SELL, TP: RM0.33. We maintain our SELL rating with a TP of RM0.33 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 - 25 Nov 2020