The new win of USD42.1m design and fabrication work is a positive surprise, leading us to upgrade our FY17E earnings by 25%. Post-earnings adjustment, we increase our TP to RM1.04 from RM0.86 by switching our valuation basis to 10.0x CY17 PER to better reflect its intrinsic value in view of better earnings certainty. Our TP also has an implied CY17 PBV of 0.6x which is in line with the average oil and gas sector valuation. Thus, we maintain our OUTPERFORM call on the stock.

USD41.2m design and build up work in Kazakhstan. Yesterday, WASEONG announced that its indirect subsidiary, PT. Wasco Engineering Indonesia, has been awarded a subcontract by Schneider Electric France SAS for the design and build up of seven Pre-Fabricated Area Sub-Stations for a project in Kazakhstan. The total contract value is approximately USD41.2m (equivalent to RM166.7m) and is expected to commence in 3Q16 and complete by 4Q18.

Fourth contract win announcement for the year. This is positive to WASEONG, showcasing its ability to win contract continuously apart from its core business of providing pipe-coating services. The contract involves 3D modelling, structural analysis and design, blast wall design and design of all ancillary system such as lighting, safety, fire and gas detection. We reckon that the job will boost its earnings performance, offsetting its deteriorating unit in Indonesia. Recall that earnings from South East Asia, excluding Malaysia was down 30% YoY to RM382.9m, contributing 21% to its overall revenue last year. We reckon the project margin should be lower than pipe-coating services, at below 10%, anticipating RM5.7m EBIT per annum (c. 5.1% of our FY17 estimates).

Increase FY17 earnings forecast by 25%. We assume minimal earnings contribution from the project in FY16 and thus made no changes to current year estimates. Meanwhile, with the recent contract win, WASEONG has achieved our FY17E revenue assumption. In view of more contract wins and contract size of Nord Stream 2 which is higher than our initial estimates of RM2.0b in the future, we increase our FY17E earnings by 25% to RM80.6m after upgrading the revenue contribution from oil and gas division.

Reiterate OUTPERFORM with higher TP at RM1.04. The Nord Stream 2 contract, in our view, remains a strong re-rating catalyst for WASEONG, at approximately 3-4 times of its current order book. Post-earnings adjustment, we decided to change our valuation basis to price-earnings ratio (PER) as we believe the earnings driven target price is a better reflection of the intrinsic value of the company given better earnings certainty in the next three years. Thus, we upgrade our TP to RM1.04 from RM0.86 by pegging earnings to 10.0x CY17 PER from 0.5x Fwd. PBV, slightly higher than our small-mid oil and gas sector’s valuation of 7- 9x due to its ability to secure contract amidst industry downturn. Our TP also has an implied CY17 PBV of 0.6x which is in line with the average oil and gas sector’s valuation (excluding Petronas-related stocks) and also consistent with its -1.5SD 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 (iii) lower-than-expected margins.

Source: Kenanga Research - 5 Aug 2016