KEY INVESTMENT HIGHLIGHTS

• Wah Seong’s 3QFY19 earnings dipped by -37.6%yoy at RM15.3m

• The dip is attributable to the completion of a major pipe coating project in early 3QFY19

• Current orderbook at RM969.4m, mainly for Oil & Gas segment at 59% of total orderbook

• FY19-20F earnings revised down by -9.7% and -26.7% respectively

• Maintain NEUTRAL with a revised TP of RM1.13 per share

WSC’s 3QFY19 dipped -37.6%yoy to RM15.3m. Wah Seong Corporation Berhad’s (WSC) 3QFY19 net profit came in at RM15.3m. This brings its 9MFY19 cumulative earnings to RM54.7m which is below our but above consensus’ full-year earnings estimates at 69.7% and 89.9% respectively. Comparing against 3QFY18, revenue and earnings were lower by -8.2%yoy and -37.6%yoy respectively. Meanwhile on a quarterly sequential basis, revenue declined by -14.9% whilst earnings dipped by -20.6% respectively. This was primarily attributable to lower revenue recognition with the recent completion of a major pipe coating project from its oil and gas business segment.

Oil and Gas. The segment’s revenue and earnings declined by - 19.9%yoy and -50.1%yoy during the quarter. This was due to the segment successfully completing a major pipe coating project in early 3QFY19 that has been on-going since late 2016. As a result, revenue contribution from the project has significantly reduced compared against the previous quarter.

Renewable Energy. Segment revenue grew by 21.8%yoy during the quarter which is attributable to significant improvement in the process equipment fabrication business. However, earnings dipped by - 52.2%yoy due to unanticipated costs escalation from a project in the boiler business.

Industrial Trading & Services. The segment’s revenue grew marginally during the quarter by +2.1%yoy due to increase in revenue from the building materials business which offset the lower revenue from the HDPE pipe business. However, earnings for the segment jumped by +100.7%yoy due to better profit recognition from the building materials business.

Nordstream 2 project has reached the tail-end. We understand that the Nordstream 2 (NS2) job has finally reach the tail-end of the job scope with the recent completion of its pipe coating portion. Out of the RM1.0b orderbook secured for the project, there remains <10% yet to be recognised by WSC at this juncture.What is left of the project is mostly on the logistic arrangements. Management expects the project to be fully completed by end-January 2020 which correspondingly will translate to lower revenue recognition coming from the NS2 in the coming quarters.

Orderbook amounts to RM969.4m as of September 2019. WSC’s orderbook as at end-September 2019 amounts to RM969.4m whilst its tenderbook amounts to RM5.4b. The oil and gas segment remains the major contributor to both WSC’s orderbook and tenderbook at 59% and 90% respectively. A significant portion of both the orderbook and tenderbook are for overseas jobs. Additionally, the orderbook increment in September 2019 (vs RM938.1m in June 2019) is primarily due to several small jobs secured during the quarter for both pipe coating as well as; engineering.

Going forward. Management disclosed that it is expecting USD200m worth of jobs to be awarded in the coming two to three months for both pipe coating and engineering. We understand that the Management is positive on securing some of the jobs which is expected to contribute positively to its topline in FY20. It is also noted that most of it will be international jobs.

Earnings impact. As guided by the Management, in 4QFY19 WSC is expected to register lower revenue and correspondingly lower earnings as it has reached the tail-end of Nordstream 2 project. Additionally, as most contracts secured recently are due to be recognised in FY20F, we are reducing our FY19F earnings by -9.7% to RM73m (from RM80.8m) previously. Furthermore, we are also reducing our FY20F earnings to RM80.8m (from RM110.3m previously) as we are expecting the recognition of revenue due in FY20F to come mainly from smaller jobs this year.

Maintain NEUTRAL with a revised TP of RM1.13. Post earnings revision and rolling forward our valuation base year to FY20, we are maintaining our NEUTRAL recommendation on WSC with a revised target price of RM1.13 (from RM0.78 previously). Our TP is premised on a revised PER20 of 10.8x pegged to EPS20 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 - 22 Nov 2019