WSC’s  FY13  core profit  of MYR43m was  in line with  our  forecast,  but significantly  below  consensus.  Despite  project  delays,  major  pipe coating projects commenced in 4Q13. Our positive stance is retained as we  observed  in  4Q13:  i) the  recovery in  O&G margins  to  the  mid-teen levels,  ii)  sustained  returns  from  renewable  energy  which  offset plantation venture losses. Maintain BUY and FV MYR2.25 (16x P/E).

• In  line.  WSC’s  FY13  core  profit  of  MYR43m  (-10%  y-o-y)  came  in  at 103% of  our  forecast, but 81% of consensus’  numbers.  This core profit included  a  MYR11m  provisioning  for  doubtful  debts  for  the  trading business  in  its  industrial  services  division,  but  excluded  a  MYR3.5m negative  goodwill  from  a  subsidiary.  The  only  major  surprise  was  a higher-than-expected tax rate in 4Q13.
• The  beginning  of  a  margin  recovery?  As  4Q13  marked  the commencement  of  big  projects,  namely  the  MYR580m  Statoil  Polarled Development  and  the  MYR231m  North  Malay  Basin  (NMB)  works,  the O&G  division  chalked  up  strong  12%  4Q13  EBIT  margin.  As  this  is  a sharp improvement over the thin 1-2% margin in 4Q12 and 3Q13, it is an indication  that WSC is no longer  saddled with lower margin projects and lower  orders  of  pipe  coating  works.  The  renewable  energy  division continued  to  deliver  amid  strong  demand  for  oleochemicals,  biodesel and palm oil industries. We continue to believe that  abundant  orders for pipe-coating are likely to boost margins to the mid-teens.
• Brief updates.  At the company’s  analyst briefing  held  concurrently with the release of  its results, many analysts were keen to know the potential for  O&G orderbook  replenishment. While  WSC has secured  small  pipe coating  projects  (from  Exxon  Longford  and  DBP  Wheatstone, <MYR100m  in  value  each)  at  the  start  of  2014,  it  is  in  the  midst  of negotiating for more jobs. The global tenderbook for O&G  works amount to  MYR5bn. The Statoil and NMB projects  have  reached 30% and 12% completion respectively.
• Maintain BUY, FV MYR2.25,  at  an  unchanged 16x FY14F P/E. This is at  a  slight  premium  to  our  mid-to-small  cap  O&G  valuations  to  reflect WSC’s earnings turnaround  and higher associate income. We make no changes to our forecasts.

Financial Exhibits

• Margins are expected to rebound due to positive sentiment from the pipe-coating and renewable energy divisions as well as higher associate income
• These will reduce the proportion of lowmargin works as well as the negatives arising from the loss-making plantation division
• Our key assumptions for pipe-coating margins are premised on expectations of bigticket orderbook replenishments
• The company is in the position of absorbing higher gearing to expand further

SWOT Analysis

Company Profile
Wah Seong Corporation provides oil and gas, and industrial services worldwide. It offers pipe coating and corrosion protection services;fabrication, and rental of gas compressors and process equipment; E&P products and services; infrastructure and building mate rials; and agro-based engineering. The company’s Oil and Gas division engages in pipe coating and pipe manufacturing for the oil and gas industry; building and operating offshore/onshore field development facilities; and the provision of equipment and services  to the power generation,  oleochemical,  and  petrochemical  industries.  Its  Renewable  Energy  division  supplies  and  manufactures  equipment  for biomass power plants, such as industrial fans, boilers, and turbines. The company’s Industrial Trading and Services d ivision is involved in trading and distribution of building materials; and the manufacture and trading of industrial pipes for the construction i ndustry.

Recommendation Chart

Source: RHB