Period

2Q15/1H15

Actual vs. Expectations

Wah Seong Corporation (WASEONG)’s 1H15 net profit came in below expectations at RM34.5m, making up 32.0%/32.2% of our/consensus full-year earnings forecast. Our forecast excludes: (i) foreign exchange gain of RM19.9m, and (ii) RM10.6m impairment of receivables.

This is mainly due to weaker-than-expected revenue from the oil and gas division amid weak crude oil prices environment.

Dividends

A 2.0 sen interim NDPS was declared in 2Q15 (ex date: 11 Sep 2015, payment date: 6 Oct 2015). It was below our expectation, accounting for 40% of our full-year estimate.

Key Results Highlights

2Q15 core net profit tumbled 24.2% QoQ to RM14.9m from RM19.6m, no thanks to lower revenue from all three main business segments and dampened PBT margins. Industrial trading and services segment recorded a loss before tax of 2.3m from a PBT of RM4.6m in the previous quarter due to project delay in pipe manufacturing business and allowance for doubtful debts in building material business while oil & gas division’s PBT fell 57.2% QoQ to RM10.7 due to weak market condition.

On YoY basis, 2Q15 net profit tanked 72.1% YoY predominantly due a 29.3% decline in top-line and weaker PBT margin from 11.9% to 4.3% on the back of significant margin compression in the oil and gas division from 18.4% to 4.4%.

1H15 cumulative net profit plunged 42.4% YoY mainly marred by the same reasons mentioned above. Do take note that the net profit was lifted after factoring in contributions from Alam-PE Holdings (L) Inc in 1H15 since its acquisition of 49% equity interest in Oct last year.

Outlook

As at 2Q15, its orderbook fell to RM1.1b from RM1.2b in the previous quarter owing to lower contract replenishment from the oil and gas division.

Going forward, pipe coating business will continue to be its main earning driver. Tender book is guided to be RM4.3b of which close to 75% are oil and gas related projects.

Contributions from both the recent JV with Evraz and Weslpun to penetrate the Indian and North American markets are anticipated to kick in at earliest in 3Q16.

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.

Change to Forecasts

We cut our earnings forecast by 26.6%/25.7% for FY15/FY16 after: (i) lowering GP margin for FY15-16 to 22% from 25%, and (ii) tuning down earnings contribution from its joint-venture and associate in view of weaker outlook in HUC and OSV segments.

NDPS for FY15-16 are reduced to 4.0/5.0sen from 5.0/6.0sen.

Rating

Downgrade to UNDERPERFORM from MARKET PERFORM.

Valuation

Post earnings changes, TP is reduced to RM0.92 from RM1.35 as we are also downgrading our target PER to 8x from 9x previously in view of weaker oil price outlook for the next two years. This is consistent with the 8x PER multiple that we applied to small-midl cap service players.

Risks

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

Source: Kenanga Research - 1 Sep 2015