Period  4Q13/FY13

Actual vs. Expectations Wah Seong Corporation’s (WASEONG) reported 4Q13 net profit of RM20.6m, brought FY13 net profit to RM32.3m. This is below both our (RM40m) and consensus (RM52.8m) expectations at 80.8% and 61.2%, respectively.

 Variance to our full-year forecasts was, yet again, mainly due to: (i) delayed gas pipe-coating activity; and (ii) quarterly loss from its associate –Petra Energy Bhd (NOT RATED).

Dividends  WASEONG declared a: (i) NDPS of 2.0 sen, bringing full-year NDPS to 4.0 sen slightly below our assumption of 5.0 sen and (ii) distribution of treasury shares as special share dividend on the basis of 1-for-150, implying 0.7% yield.

Key Results Highlights QoQ, 4Q13 net profit was up by >100% to RM20.6m (versus RM4.3m in 3Q13), mainly due to the commencement of pipecoating projects (Statoil and North Malay Basin) which were secured in the earlier part of 2013.

 YoY, the 4Q13 earnings was significantly up (+>100%) again due to the execution of its pipe-coating projects that have finally come to fruition.

 YTD, net profit was down 38.5% as 2013 was marked by: (i) lower pipe-coating project execution and (ii) slim industrial trading and services division margins, which led to overall uninspiring full-year profits.

Outlook  The Statoil and North Malay Basin contracts have purportedly kickstarted in 4Q13 with percentage-of-completion for the two projects being 12% and 30% as at Dec-13. The Statoil project is expected to be completed in 2015, whilst the North Malay Basin project will be completed by 2Q14.

 In terms of wins; WASEONG guides that it has to-date landed contracts worth RM160.7m from DBP Wheatstone and Exxon Longford. These are considered filler contracts and management expects they will help to keep the pipe-coating division busy this year. Current tender book is guided to be RM4b with almost all being oil and gas projects. Current orderbook stands at RM1.7b.

 The pipe-coating plant in Louisiana (JV with Insituform) has started operations, but meaningful contribution is only expected at a later stage. Hence, we have yet to include the potential earnings contribution in our forecasts.

 PENERGY’s contribution to WASEONG is expected to increase once work commences on the Pan Malaysia hook-up and commissioning contract. Thus far we understand that there have been delays which have caused the losses within the year.

Change to Forecasts We have revised our FY14 net profit forecast by -0.7% as we finetune the timing of the pipe-coating contracts and adjust for lower ISD and higher renewable division margins.

 We introduced our FY15 net profit forecasts of RM119.4m which feature contract replenishment of RM1bn (based on 25% success rate on RM4b tenderbook; and such contracts being executed over 2 years).

Rating Maintain UNDERPERFORM

Valuation  Our target price is raised to RM2.00 (from RM1.57 previously) as we roll-forward our base year to CY15 and increase target PER to 13x (from 12.5x).

 We have raised our target PER as we foresee FY14 to be a good year for WASEONG. However, it is still at a discount of 20% to the historical -0.5 std deviation level below WASEONG’s average mean of 16.3x given that its earnings is lumpy and highly mixed business focus (ie. plantation business).

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

Source: Kenanga