Following WASEONG’s disappointing 1H16 results, we trimmed our FY16E earnings to a marginal profit with a stronger 2H16 to offset previous losses. Despite weak earnings in 1H16, we believe WASEONG’s outlook remains attractive given that the preliminary work for Nord Stream 2 project has commenced in August. Thus, there are no changes to our FY17E earnings and we maintain our OUTPERFORM call with unchanged target price of RM1.04 peg to CY17 PER of 10x.

Below expectations. 1H16 results came below expectations of our in-house and consensus estimates (net profit forecasts of RM17.1m and RM33.1m, respectively) with a core net loss of RM13.5m after stripping off forex gain and gain on disposal of assets classified held for sale. The negative variance was due to weaker-than-expected contribution from its associate. Interim dividend of 0.5 sen/share was declared, lower than the 2.o sen/share in 2Q15.

O&G segment losses widened. Core net loss widened to RM11.2m from RM2.3m in the preceding quarter due to weaker contribution from Oil and gas division but was offset marginally by better contribution from Industrial Trading and Services division as well as renewable-energy segment. YoY, the core net loss slumped from a net profit of RM14.7m in 2Q15 largely marred by Oil & Gas division, which sank into losses of RM9.3m vs. a profit of RM10.7m a year ago). Cumulatively, WASEONG slipped into red with core net losses of RM13.5m in 1H16 from a net profit of RM28.1m in 1H15 due to similar reason mentioned above but was slightly offset by stronger contribution from industrial trading and services division. Note that its income from JV and associate sunk into losses of RM9.0m vs. a positive contribution of RM6.5m in 1H15, attributable to poorer performance from its associate, PENERGY (Notrated) which experienced a slowdown in HUC work.

FY17E earnings outlook intact. Despite some delay in contract signing for Nord Stream 2 pipe-coating job, preliminary and mobilisation work has already commenced and client is likely to deliver the first pipes in September at WASEONG’s plant in Finland followed by second batch of pipe delivery to its plant in Germany in October. Initial payments were made to WASEONG to kick start the project and actual pipe-coating work is expected to commence in 4Q16. Meanwhile, order book was up slightly to RM795m (excluding Nord Stream 2 project) from RM715m in 1Q16. Meanwhile, tender book remains at RM5b, of which RM4.0b are O&G related jobs.

Retain OUTPERFORM. We cut our FY16E earnings by 77% to RM4.0m after lowering its associate and JV contribution as we expect stronger 2H16 arising from higher revenue recognition from O&G division to offset previous losses. No changes to our FY17E earnings. However, we do not discount the possibility of impairment on its non-performing assets and investments in 2H16 to reflect its fair value, especially on its loss-making plantation business. Our TP is maintained at RM1.04 pegged to 10x FY17 PER, 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.

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 - 1 Sep 2016