We believe the positive prospect for WASEONG remains intact as the biggest earnings driver, Nord Stream 2 project with contract value of EUR600m is still in progress. Following kitchen sinking activities in FY16, our TP is increased to RM0.99 from RM0.96 previously, pegged to higher 0.8x FY17E PBV in view of lower impairment risk and de-risking of NS2 project as a result of successful project financing from the client. Maintain OUTPERFORM.

Below expectations. WASEONG?s FY16 core net loss (CNL) of RM67.4m came below expectations, at 130%/241% of our in-house/ consensus CNL estimates after stripping off multiple impairments charge on PPE, associate, inventories and receivables amounting to RM167.6m, net forex gain of RM4.4m. The negative variance was due to: (i) higher- than-expected depreciation charge, and (ii) weaker-than-expected contribution from its associate, PENERGY. No dividend was declared, as expected.

O&G segment losses widened. CNL widened to RM28.8m from RM25.0m in the preceding quarter despite revenue improving by 19% across all core sectors, no thanks to higher finance cost and weaker contribution from associate and JV (RM28.3m losses vs RM8.8m losses in 3Q16) as a result of poorer performance from PENERGY.

YoY, WASEONG slipped into losses from a core net profit of RM3.8m in 4Q15 in tandem with 26% drop in revenue, largely marred by Oil & Gas division and Renewable Energy segment. Cumulatively, WASEONG plunged into the red with CNL of RM67.4m in FY16 from a net profit of RM22.9m in FY15 due to deterioration of earnings contribution across all segments in line with a 31% fall in overall top-line.

Update on NS2 project. Commercial production for Nord Stream 2 project is expected in 1Q17. However, earnings contribution is likely to be stronger in 2H17 with pipe-coating ramping up in 4Q17 and 2018. Meanwhile, instead of getting conventional financing, the project will be funded entirely by NS2 whereby a supplementary agreement is likely to be signed within the next two months. To date, WASEONG has received EUR54.7m from client.

Retain OUTPERFORM. We make no changes to our FY17E estimates as we believe NS2 project will remain the main earnings driver. Meanwhile, FY18E earnings of RM82.7m (+11% YoY) is introduced assuming full- year contribution from NS2 and RM500m order-book replenishment. Following kitchen sinking activities in FY16, we increase our TP to RM0.99, from RM0.96 previously, pegging to higher 0.8x FY17E PBV (from 0.6x previously) in view of lower impairment risk and de-risking of NS2 project as a result of successful project financing from the client.

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 - 01 Mar 2017