KEY INVESTMENT HIGHLIGHTS

• Wah Seong’s 4QFY19 core earnings of RM35.6m came in above expectations

• The dip in 4QFY19 revenue was expected attributable to the completion of a major pipe coating project in early 3QFY19

• Current orderbook at RM929.6m, mainly for Oil & Gas segment at 62% of total orderbook

• New contract wins in the pipeline

• FY20F earnings revised upward by +24.8%

• Maintain NEUTRAL with a revised TP of RM1.40 per share

WSC’s 4QFY19 core earnings exceed expectations. Wah Seong Corporation Berhad’s (WSC) 4QFY19 reported net profit came in at - RM30.6m. However, after stripping out the one-off impairments on: (i) plant and machineries; (ii) assets on joint-venture and; (iii) receivables on their plantation business sale, WSC’s core earnings came in at RM35.6m. This brings its FY19 cumulative earnings to RM90.4m which was above our and consensus’ full-year earnings estimates at >100% respectively. As guided by the management previously, revenue recognition was lower by -33.4%yoy due to the completion of its Nordstream2 (NS2) project. However, core earnings surged by +>100%yoy after excluding the one-off impairments recognized during the quarter. Meanwhile on a quarterly sequential basis, revenue declined by -33.4% whilst earnings grew by +>100% respectively.

Oil and Gas. The segment’s revenue and earnings declined by - 62.8%yoy and ->100%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 had significantly reduced when comparing against previous quarter.

Renewable Energy. Segment revenue grew by +12.6%yoy during the quarter which was attributable to significant improvement in the process equipment fabrication business. Additionally, there were higher number of projects secured and executed during the quarter. However, earnings dipped by -35.1%yoy due to losses incurred from its boiler business.

Industrial Trading & Services. The segment’s revenue declined by - 10.6%yoy during the quarter due to lower revenue recognized from the building materials business arising from the general slowdown in the construction sector. Meanwhile, earnings dipped by -46.8% due to impairment recognized on its receivables despite the better performance from its HDPE pipe business.

Source: MIDF Research - 19 Feb 2020