WSC’s 9M13 core profit of MYR22m was below expectation, attributed to project delays at  its oil & gas and trading divisions as well as margin erosion  due  to a  higher  proportion  of  low-margin projects.  Hence, we slash  our  2013-14  earnings  by  56%  and  32%  respectively  and downgrade  the  stock  to  NEUTRAL,  with  a  lower  FV  of  MYR1.56  (from MYR2.50), to incorporate uncertainties over project execution.

• Another weak quarter. WSC‟s 9M13 core profit of MYR22m  (-43% q-oq,  -58%  y-o-y)  made  up  22%  of  our  and  34%  of  consensus‟  full-year estimates. This core profit included  MYR14m in  provisioning for doubtful debts  at  its  industrial  services  division,  and  excludes  a  MYR3.5m negative goodwill from a subsidiary.  The poor results were attributed to:i) lower margins, ii) project delays, and iii) increased  general expenses from the plantation segment.
• Margins still thin.  EBITDA margin  dipped 3.5ppts to 2.5% vs 9M12.  By segment,  we  witnessed  margin  erosion  in  the  oil  and  gas  (O&G), industrial trading and services and other (mainly E&P services)  divisions. The  renewable  energy  division  continued  to  chalk  up  stable  margins owing to demand from the oleochemical and palm oil industries.
• Topline  hurt  by  project  delays.  The  company  attributed  the  weaker revenue from its  O&G division  to:  i) delays  in its    pipe coating  projects, which we believe is the MYR611m Statoil  Polarled development project, and ii) change in product mix at its industrial trading and services division to  “high-margin,  low  volume‟ products”.  This  is  despite  the  fact  that  its O&G  segment‟s  orderbook remained  at a  healthy MYR1.2bn, or 72%  of its total orderbook of MYR1.7bn.
• Forecasts  slashed.  We  incorporate  significantly  lower  project  margins for its pipe-coating business and industrial trading segment, slight margin erosion  for  its  E&P  division,  and  continued  losses  in  the  plantation segment. While  we expect the Statoil and North Malay Basin projects to contribute  positively  by  4Q13,  we  are  conservatively  assuming  lower margins at  the initial phases of these  projects.  Accordingly, our 2013-14 forecasts are slashed by 56% and 32% respectively.
• Downgrade to NEUTRAL.  Our  FV  is cut to  MYR1.56  (from MYR2.50)based on a lower P/E of 13x (vs 14x and close to -1 SD of 12x), to reflect higher project execution risks.

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Company Profile
Wah Seong‟s principal activities are in pipe coating and corrosion protection.

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Source: RHB