• Nord Stream 2 project might be delayed pending the approval of the environmental permits

• Opposing countries amongst the five are Denmark and Sweden

• Germany however is most likely to approve the permits

• Wah Seong shielded from construction delay

• Maintain Trading BUY with unchanged TP of RM1.04

The Nord Stream 2 (NS2) project might be delayed. The NS2 project might be delayed as Russia is still awaiting the collective environmental approvals from five countries (Russia, Germany, Denmark, Finland and Sweden). Gazprom plans to begin construction in early 2018 and has a goal of completing the pipeline by late 2019. However, the planned constructions might be delayed if the approval permits are politicised amongst the countries involved which could subsequently delay the environmental permits. Two countries which are most likely cause delays to the approvals are Denmark and Sweden.

Despite this, Germany most likely to approve. Gazprom has applied for environmental and construction permits to all five countries involved; the earliest being Sweden back in September 2016. Permits to Denmark, Germany, Finland, and Russia were applied in April 2017. Germany has expressed that they are most likely to grant the necessary approvals for building the NS2 gas pipeline.

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 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.

Wah Seong to be shielded from the NS2 hiccup. As previously mentioned in our report dated 19 May, we had mentioned that the project risk will be largely borne by NS2 AG as it will be financing the entire project. Wah Seong would on be minimally impacted if there were any delays in this project as Wah Seong only plays the role of a technical expert and pipe coating specialist for the project; Wah Seong is not involved in the assembly and connecting of the pipelines from Russia to Europe. As such, in a worst case scenario, Wah Seong will be financially shielded in an event that the entire project fails.

Impact to earnings. We will not be changing our earnings forecast at this juncture pending the approval of the permits.

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.

Maintain TRADING BUY. We maintain our TRADING BUY stance 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 - 24 Jul 2017