1H14  core  profit  of  MYR66m  exceeded  expectations  (65%  of our/consensus  estimates)  on  a  31%  rise  in  revenue  and  margins expansion due to the execution of two major pipe-coating projects. YTD secured O&G contract value is MYR500m, with a MYR5bn tenderbook. Maintain BUY. FV increased to MYR2.40 (from MYR2.25) –  implying 15x FY15 P/E – given the margins turnaround, scarcity and diversification. 

Positive  surprise.  Wah  Seong’s  1H14  core  profit  of  MYR66m quadrupled  from  1H13’s  core  profit.  The  key  takeaway  from  the  1H14 review was the rise in group EBIT margins to 10% vs 1H13’s 3% (1Q14: 7%) and revenue growth of 31%. Oil and gas (O&G) revenue doubled on continuing  execution  of  the  two  major  pipe-coating  projects,  ie  North Malay Basin (NMB), which was completed in 2Q (1Q14: 50%) and the Polarled project (at 35% completion, similar to 1Q14’s 30% completion). 

Business updates.  Management held a conference call in conjunction with  the  results  release  yesterday  and  we  gathered  that  the  Polarled project is entering its next phase at the Norway plant (on schedule as per management’s guidance). We expect this phase to contribute the bulk of the  project’s  MYR580m-611m  contract  value  within  Aug  2014-June 2015. We also expect the Alam-PE joint-venture (JV) to fully contribute to joint equity income by 4Q14. Wah Seong’s outstanding orderbook is now  MYR1.5bn  while  its  O&G  tenderbook  is  MYR3.5bn  (group  level: MYR5bn).  Management  said  that  MYR500m  worth  of  O&G  and engineering contracts over 20 projects were secured YTD, ie nearly 60% of  our  FY14  orderbook  assumptions.  The  O&G  division’s  orderbook replenishment could materialise within the next two quarters. 

Upgrade FY14F/FY15F EPS by 8%/7% respectively. This follows the -100%/+14% change in associate Petra Energy (PENB MK, NEUTRAL, FV: MYR3.02)’s forecasts. It also includes a MYR3m/MYR13m inclusion for FY14F/FY15F earnings from Alam-PE (the acquisition comes without any interest costs or dilution to equity) while we assume an unchanged and conservative 15% win rate on its group level’s MYR5bn tenderbook (O&G: MYR3.5bn). 
  Maintain  BUY,  FV MYR2.40  at  an  unchanged  15x  FY15F  P/E (from MYR2.25). This is supported by a 2-year forward earnings CAGR of 74% (from 68%) and in line with small-  to mid-cap O&G valuations. We like Wah  Seong  for  its  scarcity  premium  on  its  crown  jewel  pipe-coating capabilities and it has demonstrated its ability for a margin turnaround. Inadequate orderbook replenishment remains a risk, though.

Conference call takeaways. Management carried out a conference call concurrently with the release of the quarterly results:

-  NMB  was  completed  this  quarter  with  only  low-value  related  jobs  left outstanding.  For  the  Polarled  project  (target  completion  by  2015)  the completion  rate  was  35%,  as  this  portion  of  the  work  was  carried  out  in  its Kuantan plant. We expect substantial works to flow into earnings during Aug 2014-June 2015, as the pipes are already being delivered to the Norway plant for  concrete  weight  coating.  This is  in  line  with management’s  guidance,  as per our January issue of the company’s note titled “The Return of the Coat”.

-  Total  outstanding  orderbook  as  at  June  was  MYR1.5bn,  with  breakdown for O&G: MYR1.1bn (70%), renewable energy (RE): MYR0.28m (18%), industrial trading  and  services  (ITS):  MYR0.19m (12%)  vs  MYR1.7bn  in  March (O&G: 74%, RE: 15%, ITS: 11%).

- O&G  tenderbook  was  at  MYR3.5bn,  while  group  level  tenderbook  was  at MYR5.0bn. Tenderbook for the Gulf of Mexico deepwater pipe-coating facility is USD180m. 

-  Alam-PE could contribute as early as September but is expected to contribute fully in 4Q. 

-  YTD contract value secured amounted to MYR500m for the O&G pipe-coating and engineering (estimated 20 projects in total). We expect any new contracts and  orderbook  replenishment  for  the  O&G  division  to  come  with  contract awards as soon as the next two quarters.Catalyst and risks.  Some of the catalysts include securing high-margin jobs or jobs from  its  MYR5bn  global  tenderbook  (through  FY16)  sooner  than  expected  and developing  deepwater  coating  capabilities.  However,  the  company  does  face execution risks and its orderbook replenishment is exposed to the cyclical nature of the  upstream  industry.  Orderbook  replenishment,  and  the  ability  to  diversify  its earnings through recurring income stream (chartering business via Alam-PE) and risk service contracts (indirect exposure via its associate) is pivotal to support our BUY call

Source: RHB