Despite 2Q17 earnings falling below expectations, dragged by lower JV & associate earnings coupled and a 3-week plant closure for NS2, we still expect WASEONG to grow QoQ backed by ramping up of commercial production of Nord Stream 2 project in 2H17. All in, post earnings adjustment of -7%/+6% in FY17-18E, we are keeping our OUTPERFORM call on the stock with an unchanged TP of RM1.10 pegged to unchanged 0.8x FY18E PBV.

Below expectations. 1H17 core net profit (CNP) of RM15.2m came below expectations, accounting for only 21%/19% of our/consensus fullyear estimates after stripping off reversal of inventories amounting to RM0.6m, receivables write-off of RM0.2m and net forex gain of RM0.7m largely attributable to weaker-than-expected JV and associate earnings as well as the scheduled plant closure in Finland in June for three weeks due to the summer holidays. Despite so, we still expect strong quarters ahead underpinned by escalating production for Nord Stream 2 project. No dividend was declared vs 0.5 sen in 2Q16, but we expect dividend at 30% pay-out ratio to be declared in 2H17 along with better earnings.

Marked QoQ improvement. WASEONG’s CNP improved by 44% QoQ to RM9.0m in 2Q17 in tandem with the top-line growth of 44% thanks to higher revenue recognition from oil & gas segment offsetting 75% weaker contribution from its JV and associate.

Returning to the black in 1H17. YoY, WASEONG also climbed out from the red in 2Q17 (core net loss of RM11.2m in 2Q16) backed by 36% increase in revenue thanks to a turn-around of its oil & gas segment to RM10.2m profit from a loss of RM9.3m in 2Q16. This was partially dragged by poorer performance from industrial trading & services division (RM0.4m losses vs RM4.3m profit in 2Q16) as well as renewable energy division (-42% YoY). Cumulatively, WASEONG managed to register RM15.2m profit in 1H17 from RM13.5m losses in the corresponding period last year due to the abovementioned reasons.

Update on NS2 project. Note that WASEONG had started its double shift commercial production at its Finland plant at end of May this year. However, the plant stopped production as scheduled for three weeks in June due to the summer holidays. On the other hand, the coating plant in Mukran, Germany has commenced its commercial single shift production in July and subsequently ramped up to double shift in late August. Thus, we are expecting stronger earnings in 3Q17 and subsequently full earnings contribution from NS2 coating activities in 4Q17. 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. As of 2Q17, WASEONG has received c. EUR145m from the client.

Retain OUTPERFORM. We cut FY17E earnings by 7% to RM69.2m factoring lower JV and associate earnings and slight delay in NS2 project due to the three weeks plant closure. Following that, we increased FY18E earnings by 6% accounting for higher pipe-coating activities from NS2. All in, WASEONG’s order-book remains comfortable at RM3.7b, of which 93% are attributable to the oil & gas segment. As we believe the EUR600m NS2 project will emerge as the main earnings driver, we maintain our OUTPERFORM call with an unchanged target price at RM1.10/share pegged to unchanged valuation metric of 0.8x FY18E PBV (implying 9.7x FY18E PER). Risks to our call include: (i) weaker project execution, (ii) smaller-thanexpected contract size, and (iii) lower-than-expected margins.

Source: Kenanga Research - 29 Aug 2017