Period  1Q14

Actual vs. Expectations Wah Seong Corporation (WASEONG)’s reported 1Q14 net profit of RM20.6m is within both our (RM96.6m) and consensus (RM102.2m) expectations at 21.3% and 20.2% of full-year FY14 estimates, respectively.

Dividends  No dividend was announced in 1Q14.

Key Results Highlights QoQ, 1Q13 net profit was flat at RM20.6m (versus RM20.6m in 4Q13); despite a drop in PBT (-26.2% on account of low-margin project mix being executed in 1Q14) and lower effective tax rates (-43.3%) on the back of lower effective tax rates in 1Q14 (versus 4Q14).

 YoY, the 1Q14 results turned profitable from a net loss of RM1.6m in 1Q13 as the pipe-coating projects that were delayed in 2013 finally kick-started at end-13. As there was a lack of oil and gas contract executed in 1Q13, this led to the overall loss in the oil and gas division which eventually led to net loss in 1Q13.

Outlook  The Statoil and North Malay Basin contracts have purportedly kick-started in 4Q13 and now are at c.15% and 51% percentage of completion, respectively. The Statoil project is expected to be completed in 2015 whilst the North Malay Basin project will be completed by 2Q14 (i.e. June).

 In terms of wins, WASEONG guided that it has, landed contracts worth c.RM500m (RM137.4m for the oil and gas division) in 1Q14. These filler contracts 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 order book stands at RM1.7b (from RM1.7b in Dec-13).

 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 and the RSCs start to contribute (first oil purportedly reached).

Change to Forecasts As earnings are within expectations; we maintain our FY14-15E net profit forecasts for now.

Rating Upgrade to MARKET PERFORM (from UNDERPERFORM) due to limited downside risks.

Valuation  We maintain our target price of RM2.00 based on unchanged PER of 13x FY15 EPS.

 Our target PER is a discount of c.20% WASEONG’s historical -0.5std deviation average mean of 17x which we believe is justifiable given that earnings could still be lumpy (project based) and business focus seems mixed (i.e. includes plantation business) in the short- term.

 Given the limited downside for now (as prospects seem improved and increasing catalysts (i.e. better PENERGY earnings and Louisana plant take-off) we upgrade our call on the stock.

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

Source: Kenanga