Wah Seong reported 4Q21 core loss of -RM78.6m (QoQ: -RM12.9m, YoY: RM15.4m) and FY21 core loss of -RM96.9m (YoY: -RM53.7m). The results came in below our (FY21: -RM8.7m) and consensus’ (FY21: -RM6.6m) expectations due to slower than expected revenue recognition due to reduced work activities throughout the year. With the recent job win for the EACOP project, we believe that Wah Seong should come close to breakeven in FY22. We maintain our HOLD call with a relatively unchanged TP of RM0.78 based on 0.8x FY22 P/B, in line with its 5-year historical pre-pandemic mean P/B.

Below expectations. 4Q21 core loss of -RM78.6m (QoQ: -RM12.9m, YoY: RM15.4m) and FY21 core loss of -RM96.9m (YoY: -RM53.7m) were below ours (FY21f: -RM8.7m) and consensus’ (FY21f: -RM6.6m) expectations. FY21 core loss was predominantly adjusted for: (i) net unrealised foreign exchange gain of -RM8.9m; and (ii) gain on disposal of an asset amounting to RM18.1m; and (iii) impairments totalling to RM32.7m. We believe that the key variance against our full-year forecasts was due to slower than expected revenue recognition due to reduced work activities throughout the year.

QoQ. Wah Seong reported wider 4Q21 core loss of -RM78.6m vs losses of -RM12.9m in 3Q21 as the group’s oil and gas segment fell deeper into the red due to poorer project execution and compressed profit margins for the division.

YoY. Wah Seong flipped into losses of -RM78.6m (vs profits of RM15.4m in 3Q21) and we believe that this was due to lower job profit margins throughout the quarter, which can be seen for both its trading division and oil & gas segment.

YTD. Core losses almost doubled to -RM96.9m in FY21 from -RM53.7m in FY20. While revenue was flattish, we believe that the group fell deeper into the red due to weaker JV and associate contributions, poorer project execution and compressed profit margins for its oil & gas division, and also its trading segment

Outlook. Current order book stands at RM2.7bn (+63% QoQ) as at end-4Q21 (O&G: 87%, RE: 11%, ITS: 2%). Its expected contract award in from the Qatar North-field expansion gas project in 2H22 is expected to amount to c.RM250-300m and it is not included in the current orderbook backlog. The group has guided that RM1.6bn (ex EACOP) of its orderbook will provide decent earnings visibility for the next 12-18 months while the EACOP project will provide the group an earnings visibility for 30 months.

Forecast. We make no changes to our FY22-23 earnings estimates. With the recent job win for the EACOP project, we believe that Wah Seong should come close to breakeven in FY22. We note that the job win is the group’s largest job win since the Nord Stream 2 in 2016. We assume net margins for the project to be at a mid-single digit range.

Maintain HOLD, TP: RM0.78. We maintain our HOLD call with a slightly lower TP of RM0.78 (from 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 RM2.7bn (+63% QoQ); (ii) improved operational efficiency from cost saving initiatives; and (iii) improved prospects on pipe coating contract wins from higher O&G prices. Nonetheless, clearer signs of it turning the corner are needed first for us to turn bullish on the stock.

Source: Hong Leong Investment Bank Research - 25 Feb 2022