Period  3Q13/9M13

Actual vs. Expectations Wah Seong Corporation (WASEONG) reported 3Q13 net profit of RM4.3m which brought 9M13 net profit to RM11.7m.

 At only 19.8% and 18.3% of our (RM59.0m) and consensus (RM63.9m) forecasts, the result is way below expectations.

 We believe the variance to our forecasts was mainly due to: (i) the minimal oil and gas pipe-coating activity due to delays and (ii) losses in the ISD division caused by allowances of doubtful debts and poor product mix.

Dividends  No dividend was declared during the quarter.

Key Results Highlights QoQ, WASEONG’s net profit was down 52.3% to RM4.3m (versus RM9.0m in 2Q13), mainly affected by a provision for doubtful debts recognised in the trading business which led to losses at the bottom-line. Its associate, Petra Energy, also reported a loss this quarter due to lower activities executed, which dragged sequential earnings further.

 YoY, the 3Q13 earnings were significantly down (-54.8%) from the RM9.5m recorded in 3Q12, mainly due to: (i) lower revenue recognised in the oil and gas division due to project delays (Turkmenistan has been delayed to FY14; Statoil and North Malay Basin only started in Oct-13), (ii) the industrial trading and services division being affected by a provision for doubtful debts recognised in the building materials division, and (iii) continual losses incurred in the plantation division.

Outlook  WASEONG reverted that the Turkmenistan contract has been delayed; whilst the Statoil and North Malay Basin contracts only kick-started in Oct-13. Statoil project will purportedly be completed in 2015, whilst the North Malay Basin project will be completed by 2Q14.

 The pipe-coating plant in Louisiana (JV with Insituform) has started operations, but we only expect meaningful contribution from 2014. Hence, 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 yet another set of weak 3Q13 results, we cut our FY13 projection further by 32.3% to RM40m (from RM59m) as we reduced our: (i) FY13 oil and gas revenue by 4.6% (from RM1.8b previously) to account for the delays in contracts and (ii) industrial trading and services division GP margin to 9% from 12% previously.

 We are leaving the FY14 forecasts unchanged for now pending a visit with management.

Rating Maintain UNDERPERFORM

Valuation  Our target price stays unchanged at RM1.57 based on an unchanged targeted PER of 12.5x.

 The PER is a discount to the average PER level of its mid-cap peers of 15.0x (i.e. Dayang) given the uncertainties regarding the stock and its prospects.

Risks to Our Call (i) Securing more contracts and (ii) higher-than-expected margins.

Source: Kenanga