KEY INVESTMENT HIGHLIGHTS

• Wah Seong’s reported its second consecutive quarterly loss of -RM29.6m in 2QFY20

• Disrupted project executions due to MCO 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 -RM108.6m and RM34.9m respectively

• Maintain NEUTRAL with a revised TP of RM0.49 per share

WSC’s 2QFY20 core earnings below expectations. Wah Seong Corporation Berhad’s (WSC) reported its second consecutive quarterly loss during the year of -RM29.6m in 2QFY20. This brings its 1HFY20 loss to -RM74.1m which was below our and consensus’ full-year earnings estimates respectively. As guided by the management previously, revenue recognition was lower by -67.9%yoy primarily due to: (i) the completion of its Nordstream2 (NS2) project back in 3QFY19; (ii) disruption of project executions 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 sequential basis, revenue declined by -25.6% whilst earnings dipped by >100% respectively following the slower project execution during the quarter due the enforcement of movement control order (MCO).

Oil and Gas. The segment’s revenue and earnings declined by - 84.9%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 disruptions in execution of existing work orders due to MCO exacerbated the loss.

Renewable Energy. Segment revenue and earnings contracted by - 7.3%yoy and -25.0%yoy earnings during the quarter primarily attributable to lower revenue recognition due to the implementation of MCO during the quarter which disrupted business operations.

Industrial Trading & Services. The segment’s revenue and earnings were lower by -53.7%yoy and ->100%yoy respectively during the quarter due to lower revenue recognized from the building materials business arising from the general slowdown in the construction sector and lockdown due to MCO.

Orderbook amounts to RM870.2m as of June 2020. WSC’s orderbook as at end-June 2020 amounts to RM870.2m vs RM900.0m in March 2020. The oil and gas segment remain the major contributor to both WSC’s orderbook at 61%. The burn rate for the orderbook currently stands at RM300-400m per quarter. Moving forward, we understand that the Management anticipates that the orderbook for engineering and fabrication to make up the bulk of its orderbook instead of pipe coating with a ratio of 60:40.

Going forward. We understand that Management is eyeing a smallish contract expected to be awarded in the fourth quarter of FY20 – barring any unforeseen circumstances. The contract is expected to be roughly about RM100-200m in size which we opine will help to sustain revenue and relieve margins slightly. Recall that, previously Management shared that it was expecting to secure some Engineering and Construction orders to the tune of RM600m within the year. Additionally, WSC was also eyeing pipe coating contracts in Australia which was initially due to be awarded by end-March 2020. However, these contract awards were postponed due to the Covid19 pandemic and they are expected to be hand out by end-2020 or early 2021.

Earnings impact. All things considered, we are reducing our FY20/21F earnings estimates to -RM108.6m/-RM34.9m respectively as we factor in the indefinite deferment in contract awards as well as; margin compression on its current work in hand following the expected lower revenue recognition and higher operating costs. That said, we expect this to gradually improve from 4QFY20 onwards.

Maintain NEUTRAL with a revised TP of RM0.49. Post earnings revision, we are maintaining our NEUTRAL

recommendation on WSC with a revised target price of RM0.49 (from RM0.66 previously). Our TP is premised on am unchanged PER21 of 10.8x pegged to EPS21 of 4.5sen. 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 - 28 Aug 2020