Period  2Q14/2H14

Actual vs. Expectations Wah Seong Corporation (WASEONG)’s 2Q14 net profit of RM40.1m brought 1H14 net profit to RM60.7m. This is above our full-year estimate (RM96.6m) at 62.8%; but within consensus full year estimate (RM102.0m) at 59.5%.

 We suspect the 1H14 net profits trumped our forecast on higherthan-expected margins and progress execution of the Polarled project this quarter.

Dividends  A DPS of 2.5 sen was announced in 2Q14, within our 5.0 NDPS forecasted for CY14.

Key Results Highlights QoQ, 2Q14 net profit was up by a significant 94.5% mainly due to the execution of two significant contracts within 2Q14. The North Malay Basin was completed in the current quarter (from 51% in 1Q14) whilst the Polarled reached 30% (from the 15% in 1Q14).

 YoY and YTD, net profits were both up by >100% as the pipecoating projects that were delayed in 2013 finally started to contribute materially from 1Q14 onwards.

Outlook  Management guides that there will be ongoing work in Kuantan and Norway for the Polarled project until Dec-14. From thereon, the main work continues until May-15 in Norway. The contract is currently at 30% and will be the main income generator for the rest of the year.

 Order book stands at RM1.5b (down from RM1.7b) with the oil and gas still holding majority contributions at 70%. There were no new wins since 1Q14 (YTD wins stand at c.RM500m (RM137.4m for the oil and gas division)). Company is bidding for RM3.5b oil and gas contracts of which they hope will be announced in the next two quarters.

 Overall tender book is guided to be RM5b with majority skewed to the oil and gas projects. The pipe-coating plant in Louisiana (JV with Insituform) has started operations, but meaningful contribution is only expected at a later stage.

 The EGM for the ALAM vessel equity stake buy will be held this coming Friday. We believe there would be a positive turnout, and our initial estimates are that it could lift WASEONG’s FY15 net profit by c.9-10%).

Change to Forecasts We increase our FY14E net profit by 6.2% as we ramp up the progress execution of the Polarled project this year. Whilst our new profit implies a slower 2H, we believe this is not farfetched given that Polarled project is the sole project currently being executed by WASEONG from hereon.

 We maintain FY15E net profit for now pending the turnout of the ALAM JV purchase.

Rating Maintain OUTPERFORM.

Valuation  We maintain our target price of RM2.17 based on unchanged PER of 14x FY15 EPS.

 Our target PER is at a discount of c.17% WASEONG’s historical -0.5std deviation average mean of 17x; as we believe: (i) existing earnings have a tendency to be lumpy (project based); whilst order book replenishment do not seem to echo WASEONG’s historical win rates, and (ii) other exposures (i.e. associate stakes in Petra Energy (Not Rated) are just as a passive investor at this juncture.

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

Source: Kenanga