Weaker O&G segment continued to be the main culprit for its disappointing results. WASEONG’s 1Q16 came below expectations with an unexpected core net loss of RM2.3m dragged by weaker JV and associate income. Orderbook replenishment remains our biggest concern amidst sluggish operating environment despite tender book staying at RM5.0b. Retain UNDERPERFORM call with a lower TP of RM0.68 peg to 0.4x CY17 P/BV after trimming our FY16/17E forecast by 19/13%.

Below expectations. 1Q16 results came below expectations of our in-house and consensus estimates (net profit forecasts of RM21.2m and RM60.8m, respectively) with a core net loss of RM2.3m after stripping off forex gain. The negative variance due to weaker-than-expected contribution from its associate. No dividend was declared as expected.

O&G segment the main culprit. WASEONG dwindled to losses from a net profit of RM3.8m in the preceding quarter due to weaker contribution from Renewable Energy and Oil and gas divisions resulting in a 24% decline in revenue but was offset marginally by better contribution from Industrial Trading and Services segment. Note that its income from JV and associate has sunk into losses of RM5.2m vs. a positive contribution of RM4.5m in 4Q15. We believe this is mainly due to poorer performance from its associate, PENERGY (Not-rated) which experienced a slowdown in HUC work. YoY, the core net loss slumped from a net profit of RM13.5m in 1Q15 largely marred by Oil & Gas division which posted a 50% fall in revenue. Recall that WASEONG still recorded revenue in 1Q15 from its pipe-coating mega project from Statoil which was completed early of last year.

Orderbook continues to shrink. As at 1Q16, its orderbook fell to RM715.0m from RM894.0m in the previous quarter owing to lower contract replenishment from the oil and gas division. Tender stays at RM5.0b with 80% arising from oil and gas projects. Despite losses in 1Q16, we still expect its full-year earnings to stay in the black premising on stronger 2H16. Contributions from both the JV with Evraz and Weslpun to penetrate the Indian and North American markets are anticipated to kick in earliest by 3Q16 and its USD39.5m pipe coating contract for Johan Svedrup will start to contribute in 4Q16. However, we believe that margins will remain weak owing to lack of insulation coating jobs, which typically fetch higher margins as a result of slowdown in deepwater development projects.

Retain UNDERPERFORM. We cut our earnings forecast by 19/13% for FY16/17E to RM17.0/34.5m by lowering its associate and JV contribution in view of tougher challenging environment in oil and gas sector. Our TP is lowered to RM0.68 from RM0.73 pegged to lower CY17 PBV of RM0.4x from 0.45x to factor a lumpy earnings outlook. The assigned target PBV is slightly below its -2.0SD to its 5-year average Fwd. PBV. Risks to our call: (i) Securing more contracts than expected, and (ii) higherthan- expected margin.

Source: Kenanga Research - 31 May 2016