INVESTMENT HIGHLIGHTS

• We are reintroducing Wah Seong Corp (WSC) under our small-cap stock universe

• The highlight of the company is the EUR600m Nord Stream 2 project which it secured in Sept 2016

• Timing of project execution and earnings recognition present trading opportunities for investors

• Reintroduce WSC with Trading Buy on a target price of RM1.04 per share

We are reintroducing WSC under our small-cap stock universe as we believe that the stock will benefit in the near term from the Nord Stream 2 project. In addition, we believe that the asymmetrical earnings recognition towards the latter part of FY17 into FY18 presents trading opportunity for investors.

Nord Stream 2

Nord Stream 2. In September 2016, WSC was awarded the coveted EUR600m job for concrete weight pipe coating, storage and logistic by Nord Stream 2 AG for the Nord Stream 2 (NS2) project. This project which is worth approximately RM2.8b, will provide orderbook and earnings visibility for the next three years.

Project background. The NS2 project is a planned pipeline through the Baltic Sea, which will transport natural gas over 1,200km from Russia to consumers in Europe. The pipeline involves two parallel 48 inches lines starting from southwest of Saint Petersburg and ending in Greifswald, Germany.

Project financing. Initially, WSC was unable to secure the desired financing for the project as it entails acquiring two plants in Europe, which are in Kotka, Finland and in Mukran, Germany. However, the tides turned for WSC as the project owner, NS2 AG agreed to purchase the assets for WSC instead. These two plants are crucial for the project to commence as the first pipes will be delivered from the pipe mills to the coating plant in Kotka and Mukran. Therefore, in Feb 2017, NS2 AG acquired the Mukran plant on behalf of and for WSC at an acquisition price of EUR19.5m, followed by the Kotka plant for EUR15.1m in March 2017.

Advance payments. In addition to the plant acquisitions by the project owner for WSC, as of 1QFY17, NS2 AG has advanced EUR57.4m to WSC as pre-payment for the project. In a typical milestone billing for such projects, approximately 10% will paid upon receipt of pipes, 60% in stages during the coating, 10% for stockpiling and the remaining 20% upon delivery.

Participation of WSC in NS2 project. Since the project owner, NS2 AG will be financing the entire project, WSC will only play the role of a technical expert and a coating specialist for the project. The project risk will be largely borne by NS2 AG.

Salient activities in FY17. In terms of timeline, approximately a quarter of the project will be executed in the latter part of FY17. The following depicts the estimated activity level for the project in FY17.

Source: MIDF Research - 19 May 2017