News

Yesterday, WASEONG announced that its 49%- owned joint-venture pipe coating business unit namely Bayou Wasco Insulation, LLC has been awarded a sub-contract to provide insulation coating protection for deep water, offshore insulation project in the Gulf of Mexico.

The contract is worth c.USD74.0m (equivalent to RM296.0m) and we gather that it should commence in 3Q16 for the next 12 months.

Comments

We are pleased to see WASEONG able to secure new contact in this depressed business environment. This helps to boost its orderbook by another 17% from the depleting orderbook of RM894m as of end- 2015.

Furthermore, it is a deepwater insulation coating job whereby the demand for such pipe coating services is much smaller due to massive capex cut on deepwater projects by oil majors.

We anticipate the margin for the insulation coating job to be higher than the usual anti-corrosion coating as well as weight coating job, which could go as low as less than 5% under the current environment. Assuming a 10% net margin, the project will contribute RM14.8m to the bottomline.

The contract win is still deemed within our orderbook replenishment as we have factored in RM400m each for FY16 and FY17.

Outlook

This contract win helps to replenish its depleting orderbook but contributions will only kick in earliest by 3Q16. Hence, we believe 1H16 will be weaker unless WASEONG is able to secure more jobs, which commence in 2Q16.

Going forward, pipe coating will continue to be its main earning driver. Contributions from both the recent JV with Evraz and Weslpun to penetrate the Indian and North American markets are anticipated to kick in earliest by 3Q16.

However, we believe that margins will remain weak owing to lack of insulation coating jobs, which typically fetch higher margins as a result of the slowdown in deepwater development projects.

Forecast

We maintain our forecasts as it is within our RM400m orderbook assumption for FY16-FY17.

Rating

Maintain UNDERPERFORM

Valuation

Our TP is maintained at RM0.73 peg to CY16 PBV of RM0.45x to factor weaker earnings outlook.

The assigned target PBV is also consistent with its - 2.0SD below to its 5-year average Fwd PBV.

Risks to Our Call

(i) Securing more contracts than expected, and (ii) higher-than-expected margins.

Source: Kenanga Research - 24 Mar 2016