Wah Seong reported 4Q20 core profit of RM15.4m (+64% QoQ, +6% YoY) and 12M20 core losses of -RM53.7m (12M20: RM62.6m). The results came in above our (FY20f: -RM93.1m) and consensus’ expectations (FY20f: -RM69.0m) due to better than expected O&G performance from additional cost savings measures. We are cognisant of its improvement in results in 2H20 but we choose to remain cautious as we believe that its order book is not enough to sustain its earnings for more than 1 year. Hence, we increase our TP to RM0.60 based on 0.5x FY21 BVPS (from 0.3x previously) as we factor in the improvements seen in 2H20 but maintain our SELL call.

Above expectations. 4Q20 core profit of RM15.4m (+64% QoQ, +6% YoY) and 12M20 core losses of -RM53.7m (12M19: RM62.6m) were above ours (FY20f: -RM93.1m) and consensus’ (-RM69.0m) expectations. In deriving our core earnings for 12M20, we adjusted for EI’s amounting to a net amount of RM241.1m, mainly comprising of impairments on assets amounting to RM260.9m done in 3Q20 and gain on disposal of its subsidiary amounting to RM19.2m in 4Q20. No dividends were declared for the quarter, none expected for the year.

QoQ. Core profit was up 64% due to better performance from its JV and associates and lower losses incurred from its O&G segment through successful cost rationalisation measures implemented.

YoY. Core profit was up 6% YoY due to the reasons mentioned above and stronger renewable segment contribution.

YTD. Core losses of -RM53.7m (12M19: RM62.6m) was attributable to the absence of contribution from NS2 project and deferments of projects as a result of Covid-19.

Prospects. Current order book stands at RM1.15bn as at 3Q20 (O&G: 76%, RE: 22%, ITS: 2%). Despite the perceived improvements in profitability in 2H20, we believe that the Company’s current order book could only cover revenue for 1 year. Its expected contract award from the Qatar North-field expansion gas project is only expected to amount to c.RM300-350m. However, Wah Seong has made some headroom into the green energy space as the Company has secured RM47m of wind and hydro projects in FY20. We believe that the renewable energy space would be a catalyst for Wah Seong’s growth as we believe that its reliance on large scale gas pipeline coating projects is not sustainable.

Forecast. We revise our net profit (loss) forecast from -RM68.5m/RM40.2m to RM25.8m/RM47.6m for FY21/22 in view of its better than expected 2H20 performance.

Maintain SELL, TP: RM0.60. We maintain our SELL rating with a higher TP of RM0.60 based on 0.5x FY21 BVPS (from 0.3x previously). While we believe that its impending north field expansion project win should provide some support for its earnings in FY21, the contract value is not large enough for us to warrant an upgrade in our call for the stock.

Source: Hong Leong Investment Bank Research - 24 Feb 2021