Wah  Seong’s  1Q14  core  profit  of  MYR20m  was  marginally  below expectation,  at  18%  of  our  forecasts.  Margins  had  a  slight  dip  from 4Q13 (albeit superior to 1Q13’s)  due to product mix. Nevertheless, we believe  2H14  could  paint  a  scenario  of  margins  returning  to  our  midteens assumption due to major pipe-coating projects. Maintain BUY and FV at MYR2.25 (at 15x FY15F P/E), with forecasts lowered by 7-12%.

• Slight  dip  in  margins  from  4Q13.  Wah  Seong’s  1Q14  core  profit  of MYR20m  is  slightly  below  expectation  (accounting  for  18%/19%  of our/consensus  full-year  forecasts).  The  key  takeaway  from  the  1Q14 review  is  the  slight  dip  in  group  EBIT  margins  of  8%  vs  10%  in  4Q13 (1Q13:  0.8%).  On  q-o-q  basis,  the  oil  &  gas  (O&G)/renewable  energy (RE)  divisions  charted  lower  EBIT  margins  of  10%/19%  respectively, from 15%/21% in 4Q13 due to higher mix of low-margin contracts.
• Higher revenue. Revenue for the O&G division charted strong growth in 1Q14 (87% y-o-y,  -3% q-o-q), due to contributions from major big-ticket pipe-coating  projects  for  Statoil  and  North  Malay  Basin  (NMB).  We understand  that  the  completion  rate  for  the  Statoil  job  is  at  30-35% (attributable to the Kuantan plant) and NMB at 50%. Based on  previous announcements,  the  expected  completion  dates  were  2015  and  2Q14 respectively.  Having secured some small value contracts,  its  orderbook remains unchanged from the last quarter at MYR1.7bn, comprising O&G (74%), RE (15%) and industrial trading (11%).
• Forecast changes. We cut FY14F/FY15F EPS by 7%/12%. We lowerassociate  income  forecast  by  half,  and  revenue  by  3-4%  as  the  NMB project, a key project, is close to its tail end.
• Maintain BUY.  Its  FV MYR2.25  is  at 15x FY15F P/E (from  16x FY14F P/E),  supported by 68% 2-year forward earnings CAGR and  in  line with small-to-mid cap O&G valuations. At 15x, it is still  lower than its  5-year mean  of  19x,  as  we  foresee  a  lack  of  domestic  news  flow  on  the company  (small value contracts are not subject to announcements). We like  the  company  for  its  potential  for  a  margin  turnaround. We  believe 2H14 could see  its margins returning to our mid-teens assumption, upon the tail end of NMB and the full swing implementation of the Statoil jobs.
• Catalyst  &  risks.  Securing  high-margin  jobs  or  jobs  from  its  MYR5bn global tenderbook (through FY16) sooner than expected,  though it faces execution risk and orderbook replenishment is pivotal to support our call.

Source: RHB