Following the disappointing 9M16 results, we cut our FY16E earnings to a full-year loss of RM54m to account for weaker earnings from multiple segments. However, we believe outlook for WASEONG remains intact as the biggest earnings driver, Nord Stream 2 project with contract value of EUR600m is still in progress. As such, we maintain our OUTPERFORM call with lower target price of RM0.96 pegged to CY17 PER of 10x post earnings cut.

Below expectations. 9M16 results came below expectations of our in- house and consensus estimates (net profit forecasts of RM4.0m and RM20.2m, respectively) with a core net loss of RM38.5m after stripping off forex loss and gain on disposal of assets classified held for sale. The negative variance was due to weaker-than-expected contribution from: (i) renewable energy segment, (ii) industrial trading & services segment, and (iii) its associate, PENERGY. No dividend was declared, as expected.

O&G segment losses widened. Core net loss widened to RM25.0m from RM11.2m in the preceding quarter due to weaker contribution from renewable energy division and Industrial Trading and Services division. YoY, the core net loss also widened from core net loss of RM9.0m in 3Q15 in tandem with 32% drop in revenue largely marred by Oil & Gas division, which sank into losses of RM8.5m vs. a profit of RM23.7m a year ago. Cumulatively, WASEONG slipped into the red with core net losses of RM38.5m in 9M16 from a net profit of RM19.1m in 9M15 due to deterioration in oil and gas segment and renewable energy division but was partially offset by better contribution from industrial trading and services segment. Note that its income from JV and associate sunk into losses of RM17.7m vs. positive contribution of RM14.5m in 9M15, attributable to poorer performance from its associate, PENERGY (Not- rated) which experienced a slowdown in HUC work.

NS2 pipe-coating work starting in Jan next year. The Nord Stream 2 pipe-coating project worth EUR600m is in progress but WASEONG is still in the midst of securing financing to fund the project. WASEONG has received pipes from clients for both of its plants in Finland and Germany. Actual pipe-coating work is expected to start in January, slight delay from its initial guidance of 4Q16. Meanwhile, order book was up to RM3.6b from RM795m in 2Q16 after the inclusion of Nord Stream 2 project.

Retain OUTPERFORM. We cut our FY16E earnings to a core net loss of RM53.5 from a RM4.0 profit factoring lower contribution from: (i) renewable energy segment, (ii) industrial trading & services segment, and (iii) its associate, PENERGY. Following that, FY17E earnings are trimmed by 8% to RM74.5m. Meanwhile, we do not discount the possibility of impairment on its non-performing assets and investments in 4Q16 to reflect its fair value, especially on its loss-making plantation business. Post earnings cut, our TP is lowered to RM0.96 from RM1.04 previously, pegged to 10x FY17 PER, slightly higher than our small-medium 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 - 30 Nov 2016