INVESTMENT HIGHLIGHTS

• Wah Seong Corp’s (WSC) 4QFY16 sank further into the red at –RM190.8m

• Full year losses at –RM220.8m with impairments undertaken in FY16 totalling RM191.2m

• Total orderbook stands at RM3.51b

• Maintain Sell with unchanged TP of RM0.65

• Near term share price weakness anticipated from poor earnings

Massive impairments charges. WSC’s 4QFY16 earnings slumped deep into the red at –RM190.8m, bringing the full year FY16 LATAMI to –RM220.8m. Excluding the massive impairment charges made on various assets, plants, investments and inventories totalling RM191.2m, the company would have made a slight profit before tax of RM1.7m.

Oil & Gas Segment. FY16 O&G segment revenue halved to RM423.0m while registering a pretax loss of –RM146.8m. The disappointing numbers were direct results of low activity levels in the O&G segment, further exacerbated by impairment losses of –RM89.5m on buildings and plant and equipments.

Renewable Energy Segment. Full year segment performance was also under stress as revenue and profit declined by -20.7%yoy and - 39.1%yoy respectively. Profit margin compressed by -3.5ppts to 11.6%.

Industrial Trading & Services Segment. Segment revenue deteriorated by -7.1%yoy while registering segment losses as the construction sector experienced a slowdown. In addition, the losses experience were also affected by impairment charges on plant and equipment along with inventories write-down’s and staff severance costs.

Orderbook. The company’s current orderbook stands at RM3.51b 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 previously indicated that there could be a slim chance of the company registering a minute profit in FY16, but were surprised with the massive impairment exercise undertaken in 4QFY16. With such heavy impairments made, we believe that FY17 and FY18 will be profitable. Having said that however, we do caution investors that the earnings in FY17 will most likely be back-end loaded towards the latter part of the year as the bulk of contributions from Nord Stream 2 will only be in 4QFY17.

Updates on Nord Stream 2. We believe that the NS2 project will be the saving grace for WSC. Management indicated that the project financing for the project will be financed by NS2 and to date, NS2 has advanced a total of EUR54.7m to WSC.

Maintain SELL. At this juncture, we believe that WSC will still be under earnings pressure, at least for 1HFY17 before registering meaningful earnings from NS2. In this respect, we are of the opinion that the share price could also face upside resistance due to a disconnect in share price and company earnings. Until such time when earnings eventually keep pace with its share price, we are maintaining our SELL recommendation on WSC with an unchanged TP of RM0.65 per share. Our TP is based on PER17 of 8x (five year average low) pegged to EPS17 of 8.1sen.

Source: MIDF Research - 1 Mar 2017