The pipe shipping contact award from Statoil is a plus to WASEONG, demonstrating its ability to win jobs from the same client. However, we are maintaining our earnings forecasts as this is within our order book replenishment assumption while pending finalisation of the recent massive win from Nord Stream 2, which is viewed as a strong rerating catalyst. In all, maintain OUTPERFORM on the stock with unchanged TP of RM0.86 pegged to 0.5x CY17 PBV.

JSEPP’s Pipe shipping contract. Last Friday, WASEONG announced that it has been further awarded, by Statoil Petroleum AS Norway, the provision of pipe shipping and related services pertaining to the Johan Sverdrup Export Pipeline Project (JSEPP). The total contract value is approximately USD18.2m (equivalent to RM73.9m) and is expected to commence in 2Q17 and complete by 1Q18. Recall that WASEONG secured the pipe coating contract amounting to USD39.5m from the client in December last year.

Third contract win announcement for the year. This is no surprise to us given that pipe shipping services is part of the supporting services provided by WASEONG within the pipe coating industry’s value chain. We are positive on the contract award as it increases its depleting order book of RM715m as of 1Q16 by 10% and demonstrates its good client relationship with the Norwegian oil and gas multinational. Should WASEONG is able to deliver quality services, the pipe shipping income will only start contributing in 2Q17 upon completion of pipe coating. Therefore, it is deemed to be within our order book replenishment assumption of RM400m (excluding the recent contract award from Nord Stream 2) in FY17. That said, we suspect the EBIT margin for pipe shipping is less attractive than pipe coating, probably at below 10% especially in this tight budget environment amid industry downturn.

Maintain FY16/17E earnings forecast. As the contract award is within our order book replenishment assumption while the recently announced contract win of 2,400km pipe coating job from Nord Stream 2 has yet to be finalised, we maintain our estimates at this juncture.

Reiterate OUTPERFORM. The Nord Stream 2 contract, in our view, remains a strong re-rating catalyst to WASEONG with the potential contract size of c.RM2.0b, approximately three times its current order book. Hence, we retain our OUTPERFORM call with an unchanged TP of RM0.86 pegged to 0.5x CY17 PBV. We believe our valuation is still conservative as the assigned target PBV is also consistent with its -1.5SD below to its 5-year average Fwd. PBV.

Risks to our call include: (i) Weaker project execution than expected, (ii) smaller than expected contract size, and (ii) lower-than-expected margins.

Source: Kenanga Research - 25 Jul 2016