Period

1Q15

Actual vs. Expectations

Wah Seong Corporation (WASEONG)’s 1Q15 net profit came in below expectations at RM19.6m, which accounted for 15.1%/16.3% of our/consensus earnings forecast. Our forecast excludes: (i) foreign exchange gain of RM19.5m, and (ii) RM6.7m impairment of receivables.

The main reason behind the negative surprise is the weakerthan- expected revenue from the oil and gas division caused by uncertainty in the overall industry.

Dividends

No dividend was declared in the quarter as expected.

Key Results Highlights

1Q15 core net profit was 4.8% lower YoY on the back of: (i) 20.0% YoY improvement in O & G revenue driven by higher activities, and (ii) 10.8% increment in Industrial & Trading top-line due to new projects being executed in pipe manufacturing and stronger building material sales. PBT margin of the group, however, was lower at 5.5% compared to 7.7% in the previous quarter due to lower YoY revenue and margin of the Renewable Energy segment due to sale of lower margin process equipments and boilers.

On QoQ basis, 1Q15 net profit plunged 43.2% on the back of weaker QoQ revenue for both Oil & Gas and Renewable Energy divisions primarily due to slower activities in both sectors. PBT margin also weakened by 2.7 ppt to 5.7% as a result of weakness in both divisions. In contrast, Industrial Trading & Services segment helped to partially offset the weakness with 5.2% QoQ improvement in topline due to stronger demand.

Outlook

The main earnings driver for WASEONG is its orderbook which is largely dominated by pipe-coating contracts (RM696.1m) at RM1.2b.

Tender book is guided to be RM5.0b with almost all being Oil and Gas related projects (>90.0%).

However, contract awards could be delayed for O&G related jobs as terms of contracts could be reviewed in lieu of weak crude oil price. On the other hand, the renewable energy segment is expected to be more resilient in the mediumterm.

No contract award was announced by the company since start of 2015, which makes us more cautious on the sustainability of its core earnings post the completion of current jobs on hand.

We are hopeful that the group will be able to achieve higher orderbook replenishment in 2H15 in view of stabilisation in the industry after adjustment to the low oil prices.

Change to Forecasts

We cut our earnings forecast by 17.1%/11.9% for FY15/FY16 after assuming lower pipe coating contract replenishment of RM300m/RM600m from RM500/RM800m previously in view of high uncertainty in the industry.

Rating

Maintain MARKET PERFORM.

Valuation

TP is reduced to RM1.35 from RM1.52 previously post earnings cut pegged to CY16 forward PER of 9.0x.

Risks to Our Call

(i) Securing lesser contracts than expected and (ii) lowerthan- expected margins.

Source: Kenanga Research - 26 May 2015