• Wah Seong Corp’s (WSC) 3QFY16 earnings continue to remain in the red at –RM25.4m

• Losses recorded from oil & gas segment

• Total orderbook stands at RM3.63b

• Downgrade to Sell with revised TP of RM0.65

• Near term share price weakness seen from poor earnings

Widening losses. WSC’s 3QFY16 reported losses widened to - RM25.4m. This is the second consecutive quarter the company is the in red. The company’s cumulative 9MFY16 losses sank further to – RM29.98m, dashing our and consensus hopes of narrowing losses and reducing the possibility of recording profit in FY16.

Oil & Gas Segment. 9M16 O&G segment revenue declined by - 53.1%yoy to RM326.0m while registering a pretax loss of –RM42.0m. The disappointing numbers were direct results of low activity levels in the O&G segment.

Renewable Energy Segment. Segment revenue and pre-tax profit were also strained as both declined by -12.0%yoy and -36.7%yoy to RM220.2m and RM24.4m respectively. The lacklustre numbers were largely due to fewer contracts secured coupled with compressing profit margin which declined by -4.3ppts.

Industrial Trading & Services Segment. While segment revenue was under pressure as lower revenue from the sale of building materials were recorded, segment pretax profit was buoyed by the pipe manufacturing segment.

Orderbook. The company’s current orderbook stands at RM3.63b where 92% of the jobs are from the O&G segment, 5% from the renewable energy segment and 3% from the industrial trading & services.

Impact on earnings. We are of the view that FY16 will be a disappointing year for WSC as the chances of the company reporting a net profit is getting slimmer, albeit still a possibility. As such, we are revising our FY16 and FY17 earnings forecast downwards by –15.6% and -5.3% respectively. The bulk of the earnings from Nord Stream 2 are expected to be recorded FY17.

Downgrade to SELL. In view of the broadening losses, we are downgrading WSC to Sell (previously Trading Sell) with a revised target price of RM0.65 per share. Our TP is based on PER17 of 8x (five year average low) pegged to EPS17 of 8.1sen. The company’s earnings visibility hinges on the success of Nord Stream 2 which has commenced preliminary operations, but the project financing is yet to be finalised.

Source: MIDF Research - 30 Nov 2016