Our positive conviction is reaffirmed following a meeting with WASEONG?s management as: (i) the main earnings driver, NS2 project is on track for commercial production in 2Q17, and (ii) de-risking of this project resulting from successful project financing from the client. Meanwhile, management does not expect any financial penalty from the banks on the recent technical breach of financial covenants. All in, we maintain OUTPERFORM call on the stock with unchanged TP of RM0.99 pegged to 0.8x CY17 PBV.

Update on NS2 project. WASEONG is likely to start its phase 1 of commercial production for the Finland?s plant in 1Q17. Meanwhile, its Mukran?s coating plant is the midst of upgrading, scheduled for phase 1 of commercial production by 3Q17. Both plants are capable to coat 250-280 pipes/day each and could be ramped up to its optimal production within 4-8 weeks. Hence, we expect earnings contribution from this project to improve gradually and reach its optimal production in 4Q17 and stabilise in 2018.

Project financing by client. Instead of getting conventional financing, the project will be funded entirely by NS2. To date, WASEONG has received approximately EUR80.0m from client for both capex and work capital purposes. Such cash advance, from our understanding, is recognised under other non-current liability and will be recognised as revenue should pipe coating activities commenced. A supplementary agreement is likely to be signed finalising the financial charge and other details within these two months.

No major development on other segments. As for the engineering division, management is receiving more enquiries and hoping to secure more engineering jobs from other sectors. The renewable energy segment?s revenue was on an uptrend in the past years except for FY16 (-21% YoY) due to lower contracts secured for process equipment and boilers. Management is striving to achieve 10% growth from this business unit this year, higher than its 5-year CAGR of 5%, given its relatively lower base in FY16.

Retain OUTPERFORM. We make no changes to our FY17/18E earnings estimates as we believe the NS2 project will remain the main earnings driver. Moving forward, we believe impairment risk has been minimised following kitchen sinking activities in 4Q16. Recall that certain financial covenants pertaining to loans and borrowings were technically breached. WASEONG is in discussion with the banks to seek their indulgence from complying with these financial covenants and does not expect any financial penalty on this matter. All in, we maintain OUTPERFORM call on the stock with an unchanged TP of RM0.99, pegging to 0.8x FY17E 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 - 10 Mar 2017