INVESTMENT HIGHLIGHTS

• Wah Seong Corp’s reported earnings of RM15.9m in 1QFY19

• Earnings slumped -30.9%yoy on weaker revenue from O&G segment

• Current orderbook at RM1.1b

• 65% of orderbook from O&G segment

• Maintain NEUTRAL with a revised TP of RM0.78

Earnings slumped on weaker revenue from O&G. Wah Seong’s reported 1QFY19 earnings returned to the black at RM15.9m. Its PATANCI however was recorded at RM20.2m. Despite this, earnings remained weak by -30.9% year-over-year mainly due to lower activities in Malaysian operations, where 73% are from the O&G segment. Hence, its 1QFY19 earnings came in below ours but above consensus’ full-year earnings estimates at 20% and 29% respectively.

Oil & Gas. Segment revenue and earnings contracted by -18.3%yoy and -25.6% respectively largely attributable to continued lower activities especially in the Asia Pacific region. The decrease in revenue in return resulted in lower segment profit during the quarter when compared against 1QFY18.

Renewable energy. Segment revenue recorded an increase by +21.8% due to higher revenue from all businesses in the segment comprising equipment fabrication, boiler and steam turbine. Similarly, its profit before tax also surged by +87.0%yoy respectively mainly due to improved profit margins from the steam turbine business.

Industrial Trading & Services. Segment revenue declined by - 22.1%yoy whilst earnings slumped by -94.1%yoy respectively mainly due to weak market conditions in the construction and infrastructure sectors which resulted in lower sales of building materials and HDPE popes, construction and power generation equipment. The segment profit was however contributed by gain on disposal of plant and machinery from the closure of the steel pipe manufacturing business in 2017.

Current orderbook at RM1.1b. The company’s current orderbook is at RM1.1b (unchanged vs 4QFY18). Of the RM1.1b, 65% or RM702.4b consists of O&G projects followed by RM330.2m for the Renewable Energy and RM53.1m for the Industrial Trading & Services segment.

Current tenderbook at RM6.0b. The company’s current tenderbook is at RM6.0b, unchanged from last quarter. Management guided that a more significant award of new contracts will potentially be given out in 2HFY19. The company added that it has tendered for projects in Europe, Africa and Australia.

Impact on earnings. We are revising down our FY19F earnings estimate by -21.7% to RM80.4m (from RM102.7 previously) to take into account the weaker contribution from its oil and gas segment. We have also reduced our FY20F earnings estimate by -10.6% to RM110.3m (from RM123.4m previously) as we remain wary on its orderbook replenishment progress.

Maintain NEUTRAL. Post earnings revision, we are maintaining our NEUTRAL stance on Wah Seong with a lower target price of RM0.78 per share (previously RM1.00). Our TP is premised on PER19 of 7.5x pegged to EPS19 of 10.4sen. 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 - 14 May 2019