INVESTMENT HIGHLIGHTS

• Wah Seong Corp (WSC) recorded positive 1QFY17 earnings of RM9.5m

• The positive earnings was supported by the improved oil and gas segment which turned positive during the quarter

• Total orderbook increased to RM3.76b

• Maintain Trading BUY with unchanged TP of RM1.04

1QFY17 recorded positive earnings. Despite the decline of - 7%yoy in revenue to RM316.8m, WSC registered positive PAT in 1QFY17 of RM3.3m compared to losses of -RM2.2m in 1QFY16. WSC’s PATANCI quadrupled to RM9.5m compared to RM2.3m in 1QFY16. The positive earnings were supported by the improved oil and gas segment, lower selling expenses which reduced by -23% and the decline in administrative and general expenses which fell by -32%.

Oil & Gas Segment. 1QFY17 O&G segment recorded a profit before tax of RM5.3m compared to the loss before tax in 1QFY16 of - RM11.5m. The improved earnings were supported by the commencement of several projects, cost rationalisation activities and the improving contribution from associates and joint ventures, namely Bayou Wasco and Petra Energy.

Renewable Energy Segment. The profit before tax for 1QFY16 fell by -21%yoy due to the lower revenue recorded for the quarter. The lower revenue was caused by the lower sales of process equipment, steam turbines and related equipment which was a result from the low level of activity in the market.

Industrial Trading & Services Segment. Segment revenue increased by +7.9%yoy. The higher revenue was contributed by the higher sales from the trading of building materials and HDPE (HighDensity Polyethylene) pipe manufacturing. However, the steel pipe manufacturing unit recorded lower sales due to the closure of the manufacturing operations, thus, impacting the earnings and resulting in a loss before tax of -RM62k.

Orderbook. The company’s current orderbook stands at RM3.76b where 94% of the jobs are from the O&G segment, 4% from the renewable energy segment and 1% from the industrial trading & services.

Impact on earnings. No changes to earnings as we previously indicated that the 1QFY17’s earnings would be relatively weak in comparison with our full year estimates. We are still of the opinion that the bulk of earnings will be tail-end heavy when the two plants in Germany and Finland go into full production capacity in 3Q and 4Q for the Nord Stream 2 project.

Updates on Nord Stream 2. The management updated that the Nord Stream 2 project is progressing well with the mobilisation of the German plant to commence in 3Q this year.

Maintain TRADING BUY. We are still recommending TRADING BUY on WSC with an unchanged TP of RM1.04 per share. Our TP is based on EPS18 of 10.4sen pegged to PER18 of 10x. We believe that WSC offers investors the opportunity to benefit from potentially volatile share price movements premised on project activity levels.

Source: MIDF Research - 31 May 2017