News

Yesterday, WASEONG announced that its subsidiaries, PPI Industries Sdn Bhd and Petro-Pipe (Sabah) Sdn Bhd have been awarded a sub-contract by Penta Construction Co. Ltd for the supply and delivery of coated steel pipes for Pengerang Deepwater Petroleum Terminal Project in Johor, Malaysia.

Contract value is approximately RM189m and is expected to be completed by 3Q16.

Comments

The contract award is not a surprise as it has been widely anticipated by the market earlier. That said, the win is still positive to WASEONG and further demonstrates its ability to secure contracts even in such challenging environment.

For FY15E, we assumed c.RM600m revenue from pipe coating and manufacturing segment, which is on track to be achieved.

Manufacturing of those steel pipes already started in earlier May and first shipment arrived in June this year. Therefore, we expect a six-month revenue contribution of c. RM75m in FY15 from the job assuming it is evenly spread out.

Meanwhile, operating margin for such job is anticipated at c.9% (similar to 1Q15‘s level) or slightly lower given the anticipation of lower margin amid cost cutting initiatives by oil majors globally.

Outlook

As at 1Q15, its orderbook stood at RM1.2b, of which close to 60% are from the oil and gas sector while the balance are from renewable energy and industry trading divisions.

Going forward, pipe coating business will continue to be its main earning driver. Tender book is guided to be RM5.0b with almost all being Oil and Gas related projects (>90.0%).

Further re-rating may arise as the company is eyeing to bag the second project worth up to USD100m in Norway with Statoil, which also involves handling Polarled pipes.

Nonetheless, we reckon it may not materialise in the near-term as most oil majors are tightening their capex budget. Hence, it is yet to be factored in our forecasts.

Forecast

We maintain our forecasts for now pending 2Q15 results announcement end of this month

Rating

Maintain MARKET PERFORM

Valuation

Our Target Price is maintained at RM1.35, pegged to unchanged CY16E PER of 9.0x, which is consistent with small-mid caps’ valuations (7-10x) in an industry downcycle.

Risks to Our Call

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

Source: Kenanga Research - 19 Aug 2015