INVESTMENT HIGHLIGHTS

• Wah Seong Corp’s 1QFY18 reported earnings surged more than two-folds to RM29.2m

• Strong earnings supported by strong revenue from O&G segment

• Current orderbook at RM2.51b with more than RM400m worth of replenishment achieved in the quarter

• 72% of orderbook from O&G segment

• Maintain NEUTRAL with unchanged TP of RM1.58

Surge in earnings supported by strong revenue. Wah Seong’s 1QFY18 reported earnings surged by more than two-folds to RM29.2m. The strong earnings are supported by strong revenue recognition from its ongoing projects, where 72% are from the O&G segment. 3MFY18 earnings kept pace with our and consensus earnings estimates, making up 25% and 26% of full year’s earnings forecasts respectively.

Oil & Gas. Segment revenue and earnings expanded by multiple folds on a year-over-year basis largely attributable to the execution of the Nord Steam 2 project, which is now at 41% completion.

Renewable Energy. Although segment revenue increased by +14.4%yoy, segment revenue declined by -36.1%yoy due to margin compression from the mix of products. Low margins were recorded from process equipment, equipment fabrication and steam turbines.

Industrial Trading & Services. Segment revenue marked an improvement of +19.5%yoy while maintaining segment profitability as higher sales of building material, HDPE pipes, construction equipment and power generation systems are recorded in the quarter.

Increased orderbook. The company’s current orderbook is at RM2.51b, where RM2.1b consisting O&G projects, RM290.2m consisting renewable energy projects and RM78.6m consisting industrial trading and services jobs. The company’s tenderbook is currently at approximately RM5.2b, consisting mostly pipeline jobs in Australia, Europe, Africa and locally.

MPP and TSGP pipe jobs. There is a change in government directions indicating a review in large projects, in particular projects with large foreign participation such as the Pengerang multi-product pipeline (MPP) from Pengerang to Perlis and the trans-Sabah gas pipeline (TSGP) from Kimanis to Sandakan. As such, there is a real likelihood that the awards of these projects, despite its importance could be delayed and reviewed.

Impact on earnings. No changes made to earnings estimates.

Maintain NEUTRAL. We maintain our NEUTRAL call on Wah Seong with an unchanged TP of RM1.58 per share. Our TP is based on a EPS19 of 15.8sen pegged to an unchanged forward PER19 of 10x. Key downside risks include: (i) concentration risk on O&G jobs; (ii) delays in key local projects and; (iii) orderbook replenishment risk.

Source: MIDF Research - 17 May 2018