KEY INVESTMENT HIGHLIGHTS

• Wah Seong’s reported a loss of -RM44.4m in 1QFY20

• Slower project execution and completion of major pipe coating project in 3QFY19 pulled down earnings

• Current orderbook at RM900m, mainly for Oil & Gas segment at 59% of total orderbook

• New contract awards delay to limit earnings growth

• FY20-21F earnings revised downwards to RM47.6m and RM79.7m respectively

• Maintain NEUTRAL with a revised TP of RM0.66 per share

WSC’s 1QFY20 core earnings below expectations. Wah Seong Corporation Berhad’s (WSC) reported a net loss of -RM44.4m in 1QFY20 which was below our and consensus’ full-year earnings estimates respectively. As guided by the management previously, revenue recognition was lower by -52.2%yoy primarily due to: (i) the completion of its Nordstream2 (NS2) project back in 3QFY19; (ii) slower execution of projects in-hand due to novel coronavirus (Covid19) pandemic and; (iii) deferment of several anticipated contract awards to later part of the year. Consequently, earnings dipped by >100%yoy due to the abovementioned reasons. Meanwhile on a quarterly basis, revenue declined by -23.9%qoq whilst earnings dipped by >100%qoq respectively following the slower project execution during the quarter due the implementation of movement control order (MCO) in March 2020.

Oil and Gas. The segment’s revenue and earnings declined by - 73.6%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 has significantly reduced when comparing against previous quarter. Furthermore, the deferment of several contract awards during the quarter and impairment recognised by a joint venture has led the segment to post its first segmental loss since 2016.

Renewable Energy. Segment revenue and profit contracted by - 10.0%yoy and -76.2%yoy during the quarter primarily attributable to lower revenue recognition by the boiler and Agro-Industries which has offset the substantial increase in revenue and activities in the process equipment businesses. Additionally, the implementation of MCO in March 2020 and the Lunar New Year celebration have also exacerbated the lower revenue.

Industrial Trading & Services. The segment’s revenue was lower by -32.3%yoy during the quarter due to lower revenue recognized from the building materials business arising from the general slowdown in the construction sector. However, earnings surged by >100% due to unrealised forex gain on forward contracts from its hedging.

Source: MIDF Research - 29 Jun 2020