INVESTMENT HIGHLIGHTS

• Wah Seong Corp’s (WSC) 3QFY17 earnings increased by +76.6%qoq to RM30.6m

• The increase in earnings was supported by the improved activities from the oil and gas segment

• Total current orderbook stands at RM3.4b

• Recommend TRADING SELL with unchanged TP of RM1.04

3QFY17 earnings increased by +76.6% quarter-on-quarter. In 3QFY17, WSC’s earnings continue to improve, increasing by +76.6%qoq to RM30.6m. Subsequently, its 9MFY17 normalised earnings (excluding exceptional items) turned positive to RM51.2m compared to 9MFY16’s loss of RM30.0m – This is largely in-line with our full year expectations taking into consideration tail-heavy earnings recognition.

Oil & Gas Segment. 3QFY17 O&G segment recorded a profit before tax of RM49.8m compared to the loss before tax in 3QFY16 of – RM18.4m. This improved performance is attributable to the increase in activity level and its healthy orderbook which mostly consists of the Nordstream 2 project.

Renewable Energy Segment. Unlike its O&G segment, the renewable energy segment’s profit before tax for 3QFY17 decreased by -14.2%yoy. Despite the increase in revenue of +18.3%yoy for 3QFY17, the lower earnings were impacted by the provisions for impairment of equipment.

Industrial Trading & Services Segment. Segment revenue increased by +29.7%yoy in 3QFY17 attributable to the higher sales from the trading of building materials. However, the earnings before tax decreased by -82.7%yoy due to the operational losses from its overseas subsidiaries.

Orderbook. The company’s current orderbook stands at RM3.4b where 91% of the jobs are from the O&G segment, 7% from the renewable energy segment and 2% from the industrial trading & services. The bulk of its orderbook from the O&G segment consists of its Nord Stream 2 (NS2) project which takes up 77%. As for the group’s tenderbook, it currently stands at approximately RM4.7b, with the O&G segment consisting of approximately RM3.8b.

Impact on earnings. As mentioned in our previous reports, we are expecting the earnings recognition to be tailheavy in 3Q and 4QFY17. As such, there will not be any changes to our earnings forecasts at this juncture.

Updates on Nord Stream 2. According to the management, the NS2 project is progressing on-track. Currently, both of its plants in Kotka, Finland and Mukran, Germany are working on double shifts since August 2017. Its Finnish plant has been on double shifts since late-July and its German plant followed suit soon after. As of September 2017, WSC has coated approximately 12 – 15% of pipes. As mentioned in our previous reports, activities on NS2 have started picking up in 2HFY17, translating into significant positive earnings for the company. Going forward, the company expects the NS2 project to progress as planned. In addition for its O&G segment, its Johan Sverdrup project is still ongoing at the Kuantan plant and is expected to be completed by 1QFY18.

Share price ahead of valuation. From the beginning of 3QFY17 in 1 July till 29 November 2017, the share price has risen by +27.0%. We believe that this is in anticipation of the improved results in 3Q and 4QFY17 from the increased activities of the NS2 project. Due to this, the PER has increased from 10x to it’s 12.4x in FY17. Overall, we expect sustained earnings for WSC going forward. In addition, the management has mentioned that with the recent rise in the global crude oil price, there has been a slight pickup in projects offered for tender. Yet, these projects are more forward looking towards late-2018 and are only expected to materialise in 2019 and 2020.

Downgrade to TRADING SELL. As aforementioned, despite our expectations that the company’s earnings will continue to improve, the share price has increased at a faster pace than the valuations, thus, we downgrade our call on WSC to TRADING SELL (Previously NEUTRAL) with an unchanged TP of RM1.04 per share. Our TP is based on EPS18 of 10.4sen pegged to PER18 of 10x.

Source: MIDF Research - 30 Nov 2017