Period     1Q13/3M13

Actual vs. Expectations   The 1Q13 net loss of RM1.6m was below our and the consensus net profit estimates of RM107.8m and RM100.1m respectively. 

The variance to our full-year estimate was mainly due to the minimal pipe-coating activity being performed in the quarter, thus leading to losses in the oil and gas division.  Management expects the division to return to the black from 2Q13 onwards.

Dividends    No dividend was declared as expected.

Key Results Highlights   QoQ,  WASEONG incurred a net loss (versus a RM5.2m profit previously) due to the low volume of pipe-coating projects performed within the quarter, which ultimately caused an EBIT loss of RM15.1m for the oil and gas division. Despite the oil and gas order book being at a hefty RM1.1b, around RM611.3m of the order backlog is due from the Polarled Development Project from Statoil, which will only see some mobilisation profits in 2QFY13 before it fully kicks-off in Jul-13.  The weak showing by its associate  Petra Energy (“PENERGY”) (Not Rated),  which faced low vessel utilisations during 1Q13, was also another disappointment to the current quarter results. 

YoY,  the 1Q13 earnings were significantly down (>-100%) from the RM17.8m recorded in 1Q12 due to the lack of pipecoating jobs undertaken in the current quarter, as mentioned above. 

Outlook    For 2Q13, management expects to return to the black on the back of the Turkmenistan pipe-coating project and some minimal mobilisation income from the Statoil project. Heading into 2H13, WASEONG will kick-start the Statoil project in July and hopes to hear of news on the North Malay Basin contract, which is expected to be awarded within the year. Another international pipeline coating bid could also emerge in the latter part of the year. 

The pipe-coating plant in Louisiana (JV with Insituform) has started, but we suspect it will only have a material contribution in 2014. However, we have yet to include the potential earnings contribution in our forecasts.  

WASEONG’s 26.9% interest in PENERGY could increase as the latter’s Risk-service contract (RSC) contributions emerge from 2014 onwards. 

Change to Forecasts     Despite a likely stronger performance in the next few quarters, we have, nonetheless, cut our FY13-14 projections by 15.1% and 12.2% respectively as we reduced our oil and gas division contribution in both years and also fine-tuned our  ISD division’s GP margin to 14% from 15.5% previously.

Rating  Downgraded to UNDERPERFORM (from OUTPERFORM)

Valuation     Our net profit revisions have reduced our target price to RM1.73 (from RM2.01 previously) based on an unchanged targeted PER of 12.5x, a discount to the average PER level of its mid-cap peer of 15.0x (i.e. Dayang) given the heightened uncertainties surrounding the oil and gas division. We will, however, be inclined to remove the discount should  the uncertainty in regard to its pipe-coating prospects dissipate.

Risks    1) The inability to secure more contracts going ahead and 2) lower than expected margins.

Source: Kenanga