This USD24.3m design and fabrication contract win is its first win of the year which showcased WASEONG’s ability to continuously secure jobs in new areas away from its core pipe-coating business. No changes to our estimates as it is well within our order-book assumptions. All in, we are keeping our OUTPERFORM call on the stock with an unchanged TP of RM1.10 pegged to unchanged 0.8x FY18E PBV.

EPCC of 3 substations in Kazakhstan. Yesterday, WASEONG announced that its indirect subsidiary, PT. Wasco Engineering Indonesia has been awarded a contract worth USD24.3m (c. RM103.6m) by Siemens SAS, a French company for the design and construction of three substations, including Heating, Ventilation and Air Conditioning (HVAC) for a project in Kazakhstan. The activity is expected to commence in 3Q17 and be completed by 30 October 2018.

First contract win announcement for the year. This is positive to WASEONG, showcasing its ability to win EPCC contract apart from its core business of providing pipe-coating services. The contract involves 3D modelling, structural analysis and design, blast wall design and design of all ancillary system. Besides, this, WASEONG is also responsible for the subsequent phases such as procurement, construction, installations for this project. We reckon that the job will boost its earnings performance, offsetting its deteriorating unit in Indonesia. Recall that the Indonesian arm has secured USD41.3m sub- contract by Schneider Electric France SAS for the provision of design and build-up of seven sub-stations in Kazakhstan. We reckon the project margin should be lower than pipe-coating services, at below 10%, anticipating RM7.1m EBIT per annum (c. 5.6% of our FY17 estimates).

Strengthening its balance sheet. The recent sale-and-leaseback exercise of its Kuantan pipe-coating site is expected to strengthen the balance sheet with the proceeds received via repayment of short-term borrowings. Post transaction, lease payment of RM11.7m/annum (with 3% increment every 3 years) will be higher than existing depreciation and interest costs by RM2m, or <1% of FY17E earnings but net gearing will be lowered to 0.9x from 1.2x currently.

Maintaining FY17-18E earnings forecasts. We made no changes to our earnings forecast given that the first contract win is well within our FY17E order-book replenishment assumption of RM300m. While WASEONG is announcing its 2Q17 results at the end of the month, we believe the company is set to register QoQ improvement from the core net profit of RM6.2m in 1Q17 backed by the increasing coating activities from NS2 project.

Reiterate 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. 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, and (iii) lower-than-expected margins.

Source: Kenanga Research - 02 Aug 2017