Our positive conviction is reaffirmed following a meeting with WASEONG’s management which guided for brighter prospect amidst increasing pipe-coating job demand globally. All in, we maintain OP call on the stock with higher TP of RM1.70 pegged to 12x FY18 PER premising on: (i) better earnings delivery backed by NS2, (ii) improving contract flow with recovery of oil prices.

Expanding global presence. Being one of the top two global players in the oligopolistic pipe-coating industry, WASEONG, in our view, is sharpening its edge to compete with the other competitor Bredero Shaw, a Canadian based company. While WASEONG is actively penetrating the Canadian market via its JV with Evraz Inc. NA Canada, it is also aiming to widen its market share in Europe. Post NS2 project completion in FY19, although there might not be another similar mega project up for grab immediately in the near term, we reckon that the company is well poised to capture the increasing pipecoating job opportunities in Europe. This is largely leveraged on its (i) four strategically located plants in Greece, Finland, Germany and Norway, ii) ability to execute major projects backed by its good track records. Furthermore, its scalable mobile plants coupled with contractual manpower hires allow it to maintain a relatively flexible cost structure.

Home market seems attractive. On the other hand, WASEONG’s pipe coating prospects remain positive on the home turf. Some of the jobs include the 800-km pipe manufacturing and pipe-coating jobs for the Multi Products Pipeline (MPP) project connecting Pengerang to Perlis as well as the 600km pipe manufacturing and pipe-coating jobs for the Trans Sabah Gas Pipeline (TSGP) project, which could be awarded soonest by 1H18. Note that both the projects are owned by Suria Strategic Energy Resources Sdn Bhd (SSER), a special purpose vehicle owned by the Ministry of Finance with China Petroleum Pipeline Engineering Co (CPP) being the main contractor. We believe WASEONG stands a good chance to win the projects, being the only API certified local pipe manufacturer to compete with Chinese contractors.

Potential earnings surprises in 4Q17? While we are maintaining our earnings estimates pending results announcement next month, we do not discount the possibility of outperformance premising on higher QoQ pipe-coating activities from NS2 in 4Q17. That said, our/consensus implied 4Q17 earnings forecasts both at RM28m are still conservative, which imply an 18% QoQ decline compared to its 3Q17 core earnings of RM34m.

Retain OUTPERFORM with higher TP of RM1.70. Following the disposal of its 49% owned plantation business in Congo end of last year, we see minimal impairment risk going forward except for its 26.9% investment in PENERGY. Backed by RM3.4b order-book providing 2-year earnings visibility, we believe WASEONG is poised to turn around strongly in FY17 and register 36% earnings growth in FY18 (vs. industry average of 8%). All in, we maintain OUTPERFORM call on the stock with a higher TP of RM1.70 (from RM1.40 previously), pegging to higher 12x FY18E PER (from 10x) premising on: (i) brighter job prospect amidst stabilisation of oil prices above USD60/bbl and (ii) stronger foothold in Europe. Such valuation is also in line with the O&G small cap valuation. Risks to our call include: (i) weaker-than-expected project execution, (ii) smaller-thanexpected contract size, and (iii) lower than-expected margins.

Source: Kenanga Research - 22 Jan 2018