Wah Seong reported 3Q21 core loss of -RM12.9m (QoQ: -RM7.9m, YoY: RM9.4m) and 9M21 core loss of -RM18.4m (YoY: -RM69.0m). The results came in below our (FY21f: RM23.3m) and consensus’ (FY21f: RM13.0m) expectations due to slower than expected revenue recognition from its orderbook and reduced activities during Phase 1 in 3Q21. Wah Seong’s share price has appreciated by 20% since our upgrade on 26 Aug 2021. With narrowed upside, we take this opportunity to downgrade our rating to HOLD from BUY with an unchanged TP of RM0.80 based on 0.8x FY22 P/B, in line with its 5-year historical pre-pandemic mean P/B.

Below expectations. 3Q21 core loss of -RM12.9m (QoQ: -RM7.9m, YoY: RM9.4m) and 9M21 core loss of -RM18.4m (YoY: -RM69.0m) were below ours (FY21f: RM23.3m) and consensus’ (FY21f: RM13.0m) expectations. 9M21 core earnings was adjusted for: (i) net unrealised foreign exchange gain of -RM4.8m; and (ii) gain on disposal of an asset amounting to -RM17.4m. We believe that the key variance against our forecasts was due to slower than expected revenue recognition from its orderbook and reduced activities during Phase 1 in 3Q21.

QoQ. Wah Seong reported wider 3Q21 core loss of -RM12.9m vs losses of -RM7.9m in 2Q21 as the group’s oil and gas segment flipped into the red due to weaker project execution and compressed profit margins for the division.

YoY. Wah Seong flipped into losses of -RM12.9m (vs profits of RM9.4m in 2Q21) and we believe that this was due to lower job billing throughout the quarter, resulting in significantly lower revenue of 33% in 3Q21.

YTD. Core losses narrowed to RM18.4m in 9M21 from RM69.0m in 9M20 and we believe that this was primarily attributed to a low base effect during the pandemic throughout 2020 where the group were not able to recognise revenue during the lockdown.

Outlook. Current order book stands at RM1.66bn (+21% QoQ) as at 3Q21 (O&G: 80%, RE: 17%, ITS: 3%). 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. 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 with major clients globally expected to increase upstream capex in 2022 due to higher oil prices. Wah Seong has a current orderbook to revenue cover ratio of 1.2x.

Forecast. We now forecast losses of -RM7.8m for FY21 (from profits of RM23.3m previously) to reflect lower revenue recognition and lower margins throughout the year. We leave our FY22-23f forecasts unchanged.

Downgrade to HOLD – TP: RM0.80. Wah Seong’s share price has appreciated by 20% since our upgrade on 26 Aug 2021. With narrowed upside, we take this opportunity to downgrade our rating to HOLD from BUY with an unchanged TP of RM0.80 based on 0.8x FY22 P/B, in line with its 5-year historical pre-pandemic mean P/B. We believe that the Wah Seong’s prospects would be better in FY22 due to its (i) higher orderbook backlog of RM1.66bn (+21% QoQ); (ii) improved operational efficiency from cost saving initiatives; and (iii) improved prospects on pipe coating contract wins from higher O&G prices.

Source: Hong Leong Investment Bank Research - 23 Nov 2021