Following the strong turnaround in FY17, we expect FY18 to be another great year with 29% earnings growth backed by NS2 project. Meanwhile, WASEONG, in our view, stands a good chance of winning some local jobs, paving for replenishments post NS2. Post 7% FY18E earnings upgrade, we maintain our OP call on the stock with a higher TP of RM1.80 pegged to 12.0x FY18E PER.

Above expectations. FY17 core net profit (CNP) of RM88.0m surpassed our/consensus full-year estimates by 13%/14% thanks to lower-than-expected tax expenses. However, no dividend was declared, which was below our forecast DPS of 0.5 sen.

Marked QoQ improvement. CNP improved by 16% QoQ to RM39.1m in 4Q17 after stripping off gain on disposals amounting to RM100.6m, impairment of receivables of RM1.4m, impairment of PPE of RM72.8m and net forex gain of RM0.5m. The better performance was helped by (i) better renewable energy segment (+2.3x), (ii) tax credit of RM12.3m vs. 3Q17’s tax expense of RM15.1m, and (iii) stronger JV and associate (RM2.4m profit vs. 3Q17’s RM6.1m losses; led by JV in Canada and US masking weaker PENERGY (Not-Rated)). This helped to cushion weaker oil & gas segment (-39% QoQ) which was possibly dragged by the absence of one-off gains despite higher pipe-coating activities from NS2.

Turning around strongly in FY17. YoY, 4Q17 earnings soared 54x from barely breakeven level of RM0.7m in 4Q16 backed by 2.0x surge in revenue thanks to higher earnings contribution from NS2 project. This lift its FY17 CNP to RM88.0m, turning around from RM37.8m losses a year ago helped by better oil & gas segment (RM97.4m profit vs. FY16’s RM118.8m losses) and narrowed losses by 95% from industrial trading & services division overwhelming weaker renewable energy segment (- 20%; lower top-line and margin compression).

Home market seems attractive. 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 600-km 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) as 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.

Retain OUTPERFORM with higher TP. We raised FY18E earnings by 7% to RM113.4m to account for: (i) strong JV contribution from Canada and US, and (ii) lower interest rates offsetting lower contribution from its associate, PENERGY. FY19E NP of RM87.9m (-23% YoY) is introduced assuming NS2 to be completed by 1H19 and RM500m order-book replenishments. Thus, we maintain OP call with higher TP of RM1.80 from RM1.70 previously, pegged to 12.0x FY18 PER. Risks to our call include: (i) weaker project execution, (ii) smaller-thanexpected contract size, and (iii) lower-than-expected margins.

Source: Kenanga Research - 27 Feb 2018