Following the strong 3Q17 results where core earnings jumped 2.7x sequentially and beat our forecast, we upgrade WASEONG’s FY17-18E earnings by 13-21% on higher contribution from NS2 project. In all, we are keeping our OUTPERFORM call on the stock with a higher TP of RM1.40 pegged to 10.0x FY18E PER, switching from PBV valuation in view of better earnings delivery and lower impairment risk.

Above expectations. At 71%/75% of our/consensus full-year estimates, 9M17 core net profit (CNP) of RM48.9m is deemed above expectations thanks to stronger-than-expected contribution from the NS2 project. We are expecting another decent set of results which is comparable to 3Q17. No dividend as expected.

Marked QoQ improvement. CNP improved by 2.7x QoQ to RM33.7m in 3Q17 after stripping off inventories write-off amounting to RM4.4m and net forex gain of RM1.4m. In tandem with the top-line growth of 68%, the better performance was helped by higher earnings contribution from oil & gas segment (+4.4x), led by higher pipe coating activities from NS2. This is offset by weaker contribution from its JV and associate, slipping into RM6.1m losses from RM1.7m profit in 2Q17 dragged by poorer performance from its associate, PENERGY (Not-Rated) and JV in US.

Returning to the black in 9M17. YoY, WASEONG also climbed out of the red in 3Q17 from core net loss of RM25.0m in 3Q16, backed by 1.7x increase in revenue thanks to a turnaround of its oil & gas segment to RM55.3m profit from a loss of RM8.5m in 3Q16. This was partially dragged by poorer performance from renewable energy division (-20% YoY). Cumulatively, WASEONG managed to register RM48.9m profit in 9M17 from RM38.5m losses in the corresponding period last year due to the abovementioned reasons.

Update on NS2 project. Note that WASEONG has resumed its doubleshift commercial production at its Finland plant in July this year post the three weeks maintenance in June due to the summer holidays. On the other hand, the coating plant in Mukran, Germany has also commenced its commercial double-shift production in August. Thus, we are expecting stronger earnings in 4Q17 and subsequently full earnings contribution from NS2 coating activities in FY18. Meanwhile, instead of getting conventional financing, the project will be funded entirely by NS2 whereby a supplementary agreement is signed in 3Q17.

Retain OUTPERFORM. Following that, we raised FY17-18E earnings by 13-21% to RM78.2-106.1m accounting for higher pipe-coating activities from NS2. All in, WASEONG’s order-book remains comfortable at RM3.4b, of which 91% are attributable to the oil & gas segment. As we believe the EUR600m NS2 project will continue to be the main earnings driver, we decided to switch our valuation model to priceearnings ratio (PER) instead of price-to-book (PBV) in view of better earnings visibility and lower impairment risk. Thus, we maintain our OUTPERFORM call with a higher target price at RM1.40/share (from RM1.10) pegged to its 5-year mean valuation of 10.0x FY18 PER (from 0.8x FY18E PBV).

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

Source: Kenanga Research - 30 Nov 2017