Ramping up coating activities for NS2. The EUR600m Nord Stream 2 (NS2) project is expected to be WASEONG’s main earnings driver until FY19. More than 82.5k pipe joints have been received at both sites in Kotka, Finland and Mukran, Germany. For the Kotka plant, pre- qualification test (PQT) was done in February and the commercial production was started at 27th March 2017. The plant will be reaching full production in the near term, double its existing production. Meanwhile, the coating plant in Mukran is in the midst of upgrading and scheduled for PQT in July and commercial production in August this year.

Fixed margin plus bonus. Meanwhile, instead of getting conventional financing, the project will be funded entirely by the client itself, NS2, a consortium largely led by Gazprom. To date, WASEONG has received EUR54.7m from client and the acquisition of both plants are also funded by the client. We gather that there won’t be any finance cost charged on the fund provided. However, WASEONG is required to be transparent on its costing and a fixed profit margin is agreed to ensure profitability of the project. Additionally, should WASEONG is able to meet certain KPIs, the company will enjoy additional performance bonus at the end of the project.

Update on other segments. Its renewable segment is expected to stay profitable underpinned by the recurring O&M services of the boilers and turbines sold previously despite lack of new orders. The contribution from industrial trading & services segment will be relatively smaller given that WASEONG had downsized its spiral welded pipe manufacturing facility in Prai last year. On the other hand, we expect better contribution from its associate, Petra Energy Berhad (Not-Rated) and joint-venture Alam-PE, offsetting the newly established JV in India which is still loss making at this juncture.

Keeping our estimates. We make no changes to our FY17-18E estimates as we believe the NS2 project will remain the main earnings driver. Earnings contribution is likely to be stronger in 2H17 with pipe- coating ramping up in 4Q17 and 2018.

Retain OUTPERFORM. WASEONG’s order-book remains comfortable at RM3.5b, of which 93% is attributable to the oil & gas segment. Following kitchen sinking activities in FY16, we do not expect significant impairment to be made this year except for further write-off on the remaining value of its plantation business of up to c.USD5m. Balance sheet wise, despite the intention of keeping its net gearing benchmark below 1.0x (actual net gearing at 1.3x as of 1Q17), WASEONG prefer to retain the bulk of its credit lines facilities in order to channel the funds for new projects. All in, we are keeping our OUTPERFORM call on the stock with unchanged TP of RM1.10 pegged to unchanged 0.8x FY18E PBV.

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

Source: Kenanga Research - 22 Jun 2017