WASEONG managed to return to the black in 1Q17, driven by cost rationalisation activities and positive contribution from its JV and associate. Moving forward, we expect stronger quarters backed up by ramping up of commercial production of Nord Stream 2 project. All in, we are keeping our OUTPERFORM call on the stock with higher TP of RM1.10 after rolling forward our valuation to FY18 pegging to unchanged 0.8x PBV.

Deemed within expectations. WASEONG?s 1Q17 core net profit (CNP) of RM6.2m is deemed within expectations despite only accounting for 8% of our in-house/ consensus full year estimates after stripping off reversal of inventories and receivables write-off amounting to RM0.7m, net forex gain of RM0.7m and one-off gain from its associate as we expect strong quarters ahead underpinned by escalating production for Nord Stream 2 project.

Returning to the black. WASEONG returned to the black with CNP of RM6.2m in 1Q17 from core net loss of RM28.8m in 4Q16 helped by narrowing losses from oil & gas segment and industrial trading & services division as well as positive contribution its JV and associate (vs net losses in 4Q16).

YoY, WASEONG also climbed back from the red (core net loss of RM2.3m in 1Q16) despite a 7% drop in revenue thanks to narrowing losses from oil & gas segment and 71% lower tax expense but was dragged by poorer performance from industrial trading & services division (RM0.1m losses vs RM2.9m profit in 1Q16). The better performance from the oil & gas segment is reflective of the aggressive cost rationalisation activities amidst lower work orders received.

Update on NS2 project. Note that WASEONG had started its single shift commercial production at its Finland plant in March this year. Going forward, WASEONG will ramp up its production in Finland while the coating plant in Mukran, Germany is expected to commence its commercial production in 3Q17. Meanwhile, instead of getting conventional financing, the project will be funded entirely by NS2 whereby a supplementary agreement is likely to be signed in the near term. To date, WASEONG has received c. EUR80m from the client.

Retain OUTPERFORM. We make no changes to our FY17-18E estimates as we believe the EUR600m NS2 project will emerge as the main earnings driver once production picks up. WASEONG?s order-book remains comfortable at RM3.8b, slightly higher from RM3.7b in 4Q16 of which 94% is attributable to the oil & gas segment. Meanwhile, we have rolled over our valuation base year to FY18 and thus, our target price is increased to RM1.10/share from RM0.99/share previously pegged to unchanged valuation metric of 0.8x PBV.

Risks to our call include: (i) weaker project execution, (ii) smaller-than- expected contract size, and (iii) lower-than-expected margins.

Source: Kenanga Research - 31 May 2017