KEY INVESTMENT HIGHLIGHTS

• Wah Seong’s returned to black with a normalised profit of RM9.4m in 3QFY20, after two consecutive quarterly losses

• Renewable Energy segment cushioned earnings dragged by one-off impairments from Oil & Gas segment

• Current orderbook at RM1,108.8m, mainly for Oil & Gas segment at 73% of total orderbook

• A significant contract award expected in 1QFY21

• FY20F earnings revised upwards to -RM53.8m, FY21F maintained

• Maintain NEUTRAL with an unchanged TP of RM0.49/share

WSC’s 3QFY20 core earnings above expectations. Wah Seong Corporation Berhad’s (WSC) returned to black after two consecutive quarterly loss during the year. It reported a normalised 2QFY20. This brought its 9MFY20 loss down to -RM64.7m which was above our and consensus’ full-year earnings estimates respectively. As guided by the management previously, revenue recognition was lower by -29.7%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 (Covid-19) pandemic and; (iii) deferment of several anticipated contract awards to later part of the year. Consequently, earnings declined by -38.7%yoy due to the abovementioned reasons. Meanwhile on quarterly sequential basis, revenue and earnings surged by +86.5%yoy and >100%yoy following the increase in work progress during the quarter which were reduced in 2QFY20 due to the enforcement of movement control order (MCO).

Oil and Gas. The segment’s revenue and earnings declined by - 38.5%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 well as; the slowdown in business activities worldwide following the ongoing spread of the Covid-19 pandemic. Furthermore, the segment also recognised a one-off impairment loss during the quarter amounting to RM237.8m which exacerbated the segment’s performance during the quarter.

Renewable Energy. Segment revenue contracted by -11.7%yoy during the quarter due to lower revenue from its boiler and steam turbine business. That said, the segment reported a +95.3%yoy increase in earnings during the quarter primarily attributable to higher contribution from the process equipment fabrication coupled with the absence of costs overrun during the quarter.

Industrial Trading & Services. The segment’s revenue and earnings were lower by -21.6%yoy 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.

However, the segment recorded a +6.6%yoy increase in profit following better margins recognised from its current work orders at 2.58% vs 1.8% in 3QFY19. The segment’s profit also rebounded from the dip in 2QFY20 by >100% following the business restrictions brought upon by the enforcement of MCO.

Orderbook amounts to RM1,108.8m as of September 2020. WSC’s orderbook as at end-September 2020 amounts to RM1,108.8m vs RM870.2m in June 2020. The oil and gas segment remain the major contributor to both WSC’s orderbook at 73%. The burn rate for its orderbook currently remains at RM300-400m per quarter. Meanwhile, its tenderbook currently amounts to about RM4.0b in total which include the tender for a major pipe coating work in the Middle East. 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 WSC is currently waiting for a pipe coating work contract to be awarded in the 1QFY21. The pipe coating work which is expected to start in the second half of FY21 will be a significant contributor to its earnings next year given that it will be a major pipe coating work that could potentially cover 4,000km worth of pipeline. We internally estimate that the contract could worth between RM1.5-2.0b.

We also understand that Management is expecting some USD100m worth of contracts in the coming few weeks before the end of FY20 to assist the company in sustaining its revenue and earnings pending the award of the major pipe coating work in the Middle East.

Earnings impact. All things considered, we are revising our FY20F earnings estimates to -RM53.8m (from -RM108.6m previously) as we anticipate the work progress in 4QFY20 as well as; potential new contract wins to result in another positive quarter for the company. That said, we are maintaining our FY21F earnings at this juncture pending further announcement on its pipe coating contract award.

Maintain NEUTRAL with an unchanged TP of RM0.49. We are maintaining our NEUTRAL recommendation on WSC with an unchanged target price of RM0.49. 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 - 25 Nov 2020