Wah Seong reported 2Q21 core loss of -RM7.9m (QoQ: RM2.4m, YoY: -RM33.5m) and 1H21 core loss of -RM5.5m (YoY: -RM78.4m). The results came in below our (FY21f: RM32.3m) and consensus’ (FY21f: RM33.9m) expectations due to slower than expected revenue recognition from its orderbook and the resurgence of Covid-19 cases which led to stricter SOP adherence in 2Q21. However, total orderbook cover has improved from 0.8x in 1Q21 to 1.0x in 2Q21 as orderbook has increased by 15.7% in 2Q21 to RM1.37bn. Wah Seong will also continue to streamline its operations to optimise its cost. Hence, we upgrade our Hold call to a BUY with an unchanged TP of RM0.80 based on 0.7x FY21 BVPS as the stock has declined by more than 30% from its YTD high of RM0.89.

Below expectations. 2Q21 core loss of -RM7.9m (QoQ: RM2.4m, YoY: -RM33.5m) and 1H21 core loss of -RM5.5m (YoY: -RM78.4m) were below ours (FY21f: RM32.3m) and consensus’ (FY21f: RM33.9m) expectations. The results shortfall was due to slower than expected revenue recognition from its orderbook and resurgence of Covid -19 cases in 2Q21 which led to stricter SOP adherence. In deriving our core earnings for 1H21, we adjusted for EI’s amounting to a net amount of -RM16.0m, mainly comprising of (i) net unrealised foreign exchange gain of -RM4.1m and (ii) gain on disposal of an asset amounting to -RM11.0m. No dividends were declared for the quarter, none expected for the year.

QoQ. Wah Seong’ core loss of -RM7.9m vs a profit of RM2.4m in 1Q21 was primarily due to its product mix, where the revenue generating activities carried out in had a lower margin.

YoY. Wah Seong recorded a significantly lower core loss of -RM7.9m (vs -RM33.5m in 2Q21) due to an increase in revenue of 39% from a higher orderbook backlog. The higher orderbook backlog can be attributed to (i) higher oil prices and (ii) a more favourable O&G market outlook.

YTD. Wah Seong’s narrowing of core loss from -RM78.4m to -RM5.5m was primarily attributed to higher revenue recognition from the same reasons mentioned in the YoY para.

Outlook. Current order book stands at RM1.37bn (+15.7% QoQ) as at 2Q21 (O&G: 79%, RE: 17%, ITS: 4%). Its expected contract award in from the Qatar North-field expansion gas project in 2H21 is expected to amount to c.RM250-300m and it is not included in the current orderbook backlog. Wah Seong has also successfully optimised its operating cost and this can be seen by the consistent reduction YoY. Its orderbook replenishment has also been healthy, with outstanding orderbook holding steadily above RM1bn since 3Q20. We believe that Wah Seong would be able to secure more contracts in FY22, bringing its orderbook cover ratio to more than 1.0x. Wah Seong has a current orderbook to revenue cover ratio of 1.0x

Forecast. We cut our FY21 forecast by -28% to factor in some operational issues due to Covid-19 whilst maintaining our FY22-23 forecast as we believe that its operations will improve sequentially from FY22 to FY23.

Upgrade to BUY at unchanged TP of RM0.80. We upgrade our HOLD rating to BUY with an unchanged TP of RM0.80 based on 0.7x FY21 BVPS. We believe that the prospects for Wah Seong are turning for the better due to its (i) higher orderbook backlog of RM1.37bn (+15.7% QoQ); (ii) improved operational efficiency from cost saving initiatives; and (iii) improved prospects on pipe coating contract wins from higher O&G prices. The stock has declined by more than 30% from its YTD high of RM0.89.

Source: Hong Leong Investment Bank Research - 27 Aug 2021