Period  3Q14/9M14

Actual vs. Expectations Wah Seong Corporation (WASEONG)’s 3Q14 net profit of RM30.1m brought cumulative 9M14 net profit to RM91.0m. This is above our (RM99.7m), and consensus (RM110m), full-year estimates, at 91.3% and 83.1%, respectively.

 We suspect the 3Q14 net profit trumped our forecast on higher-than-expected margins and progress execution of the pipe-coating contracts.

Dividends  No dividend was announced this quarter.

Key Results Highlights QoQ, 3Q14 net profit was down by 24.4% mainly as there was only one contract (the Polarled project which currently stands at 70-72% completion) that was performed in 3Q14 versus the two projects done in 2Q14. (North Malay Basin and Polarled).

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

Outlook  WASEONG reported contributions from Alam Maritim (MP; TP: RM0.84) in 4Q14 given that the purchase was completed beginning Oct-14. We have already accounted for that in our FY14-15 forecasts.

 Current earnings drivers for WASEONG are (i) an order book which is largely dominated by pipe-coating contracts at RM1.4b (from RM1.5b in Jun-14) and (ii) PENERGY’s contribution.

 Tender book is guided to be RM3.6b with almost all being oil and gas projects. Indications of wins are by end-14 or early 1Q15.

 Other catalysts will be the successful takeoff of the jointventure pipe-coating plant in Louisiana (JV with Insituform).

Change to Forecasts

 We increase our FY14E net profit by 16% as we ramp up the progress execution of the Polarled project this year; and also increase pipe-coating GP margins by 2% (from 26%). This is to accommodate the current execution of the Polarled project.

 We are keeping our FY15 net profit forecasts intact for now given orderbook replenishment is still uncertain at this juncture.

Rating Downgrade to MARKET PERFORM (from OUTPERFORM)

Valuation  We are downgrading our PER for the stock to 9x (from 14x) in lieu of the oil and gas sector de-rating on the back of weak crude oil prices.

 Given the cuts, we are downgrading our TP on the stock to RM1.54 based on FY15EPS of 17.2 sen.

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

Source: Kenanga