Period  2Q13/1H13

Actual vs. Expectations  Wah Seong Corporation (“WASEONG”) reported 2Q13 net profit of RM9m which brought 1H13 net profit to RM7.4m. At only 8.1% and 8.9% of our (RM91.5m) and consensus (RM83.8m) forecasts, the result is way below expectations.

 The variance is mainly due to the minimal pipe-coating activity during the quarter under review. As mentioned in our previous note, management expects earnings to normalise in 2H13 on the back of the Statoil contract contributing from Jul-13 onwards.

Dividends  A NDPS of 2.0 sen was declared; keeping our total 5.0 sen NDPS expected for FY13E on track.

Key Results Highlights  QoQ, WASEONG achieved a net profit of RM9m (versus a loss of RM1.6m in 1Q13) mainly due to: (i) better margins from its oil and gas division; and (ii) positive contribution from its associate Petra Energy (“PENERGY”) (Not Rated). Recall, 1Q13 had been impacted by low margin oil and gas projects, which were inadequate to cover the overheads; whilst its associate registered low vessel utilisation, hence the loss in 1Q13.

 YoY, the 1Q13 earnings were significantly down (-55.2%) from the RM20m recorded in 2Q12, mainly due to: (i) lower margins from the oil and gas division due to the scenario mentioned above; and (ii) the industrial trading and services division being affected by a slowdown in the pipe manufacturing business as well as a provision for doubtful debts recognised in the trading business.

Outlook  For 2Q13, WASEONG managed to return to the black on account 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 is awaiting news on the North Malay Basin contract tender, which is expected to be awarded within the year. Another international pipeline coating bid could also emerge in the later part of the year.

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

 PENERGY’s contribution to WASEONG could increase as the former’s prospects have improved post winning the long-term hook-up and commissioning (HUC) contract.

Change to Forecasts  In view of the weak 1H13 results, we have cut our FY13-14 projections further by 35.5% and 9.2% respectively as we reduced our: (i) FY13 oil and gas division GP margins to 20% (from 26% previously); and ii) industrial trading and services division contribution in both years to RM600m and RM650m (from RM700m per annum) and also fine-tuned the division’s GP margin to 12% from 14% previously.

Rating   Maintain UNDERPERFORM

Valuation  Our net profit revisions have effectively reduced our target price to RM1.57 (from RM1.73 previously) based on an unchanged targeted PER of 12.5x, a discount to the average PER level of its mid-cap peers of 15.0x (i.e. Dayang) given the heightened uncertainties surrounding the oil and gas division.

Risks  (i) The inability to secure more contracts going ahead; and (ii) lower than expected margins.

Source: Kenanga