We reiterate our OUTPERFORM call on WASEONG with an unchanged target price of RM1.04 pegged to CY17 PER of 10x following the announcement of Nord Stream 2 project amounting to RM2.7b, which is slightly higher than our anticipation. However, we maintain our earnings estimates in view of slower project revenue recognition in 1Q17 and as we also believe the full impact should only be felt in FY18.

Nord Stream 2 project worth RM2.7b. Yesterday, WASEONG announced that its pipe coating business unit, Wasco Coatings Europe B.V. (WCEu), an indirect wholly-owned subsidiary of WSC incorporated in Netherlands has finally signed the contract with Nord Stream 2 AG on 6 September 2016 and the contract value is c. EUR600m (equivalent to RM2.7b). Recall that the contract involves concrete weight coating and storing services of approximately 2,400km of pipes with a three-year duration ending 3Q19.

Mobilisation work commenced last month. In early August, a letter of intent was signed to commence preliminary and mobilisation work. 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 1Q17. Meanwhile, the total capex and working capital needed for the project are estimated at 10% of contract value at RM270m and WASEONG is currently in the midst of securing financing.

No changes to our earnings forecast. The contract value is slightly higher than our estimate of RM2.5b. However, we made no changes to our FY16-17 earnings estimates as the revenue recognition from the project will be slow in 1Q17.

Reiterate OUTPERFORM. The Nord Stream 2 contract, in our view, remains a strong re-rating catalyst for WASEONG, at approximately 3.4 times its order book of RM795m as of 2Q16. Hence, we maintain our OUTPERFORM call with an unchanged TP of RM1.04 pegging earnings to 10.0x CY17 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. 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 - 8 Sep 2016