- We have cut Wah Seong's FY12F-FY14F earnings by 11%-27% as the group's 1HFY12 net profit of RM38mil (-46% YoY) came in below expectations, accounting for 34% of our earlier FY12F earnings of RM111mil and 33% of street estimate's RM115mil. This stemmed from lower-thanexpected margins at the oil & gas division.

- The group's 2QFY12 net profit rose 13% QoQ to RM20mil due to higher contributions from the pipe-coating and renewable energy divisions. This also stemmed from some lumpy recognition of the remaining RM551mil pipe-coating job for the Gorgon project in Australia together with other higher margin projects which drove the EBIT margins of the oil & gas segment by 3ppts to 11%. Recall that there was some delay in the recognition for the Gorgon job due to the client's request in 1QFY12.

- For 3QFY12, we do not expect significant earnings improvement. But there could be some lumpy contributions from the green-field Congo palm oil plantation project in 4QFY12 arising from the initial forest clearance.  But as any estimates for these activities are premature at this stage, we have only incorporated Wah Seong's existing oil & gas, renewable energy and industrial trading activities into our projections. 

- The group secured less new orders in 2QFY12, which led to an 8% QoQ decline in order book to RM1.1bil currently. Wah Seong had secured less oil & gas related jobs vs. its other divisions, which caused the oil & gas services share to fall from 63% to 56% of the group's outstanding order book. Conversely, the order book share for the renewable energy segment has risen from 21% to 24%, while industrial trading & services division rose from 16% to 20%. 

- Wah Seong's recent 27% equity stake in Petra Energy remains exciting even though there may not be any direct synergies which can be generated in the short term. But Petra Energy's potential stake in the small field risk sharing contract with Coastal Energy for the Kapal,Banang and Meranti fields and involvement in improved oil recovery projects is likely to sustain interest in the stock. But news flow for new pipe-coating jobs may only begin to emerge for the ongoing rollout of the RM16bil North Malay basin gas project towards the end of the year.

- The stock currently trades at a fair FY13F diluted PE of 12x, but uncertainties over the group's 470,000ha oil palm plantation investment in the Republic of Congo could continue to cap interest in the near term. 

Source: AmeSecurities