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Wednesday, November 30, 2016

Brokers Report: Wah Seong - Better Year Ahead

Retain outperform with target price (TP) of RM1.00

Wah Seong’s 9MFY16 performance continues to be affected by the lack of projects in the O&G segment fueled by the deferment of capital expenditure activities by oil majors. Revenue subsequently recorded RM946.4m (-32.0% YoY), and with a core loss of RM30.0m (->100.0% YoY). This was further hampered by the softer market in Malaysia and thus saw a reduction in renewable energy (RE) activities. Wah Seong’s results missed both ours and consensus’ estimates by >100.0%. On a positive note, the Group’s orderbook was boosted to RM3.6bn (2QFY16 - RM795m) to include the Nord Stream 2 award which affirms Wah Seong’s recovery going forward as the prevailing weaker performance is due to the depleting orderbook, and not from its execution capabilities. Our Outperform view on Wah Seong, is retained but with an adjusted TP of RM1.00 pegged to 8x PE and FY17F EPS of 12.5sen. Our adjustment is due to our lowered estimates from the Group’s associates in particular Petra Energy whereby we have adjusted our estimates from the weaker performance due to the weaker oil landscape.
  • Orderbook boost. Wah Seong’s current orderbook for 3QFY16, stands at RM3.6bn (June 2016: RM795m) comprising of 92% O&G contracts, 5% renewable energy (RE) and 3% industrial trading and services (ITS). The O&G orderbook worth RM3.4bn, comprises of projects such as Nord Stream 2, USD18.2m award for the Johan Sverdrup Export Pipeline Project (JoSEPP), USD41.2m subcontract award from Schneider Electric France SAS for a project in Kazakhstan, Shell E6 field, offshore Sarawak and Petronas Carigali F12 Kumang Cluster gas field development.
  • Updates. The Nord Stream 2 pipes have been delivered to its respective plants in Finland end-September and to Germany in October, and is targeted to begin coating by January. The operations have been funded by an upfront payment by the client, based on the LOI signed. We remain concerned on the project’s major financing status which is still pending however. The Gulf of Mexico contract is targeted to begin coating in 4QFY16, having won a USD74m job from Shell. We understand that the main contributions from this project will kick-in 2017/18. Meanwhile the Group is aggressively bidding for other jobs in this region, with values ranging between USD20m to USD40m.
  • Maintain Outperform with a TP of RM1.00 pegged to 8x PE and FY17F EPS of 12.5sen. The stock has limited downside as the Group’s performance continues to be affected by the oil price sentiment and not due to its execution capabilities. Thus upon recovery of the oil markets, we should see further positive reflections in its price levels.

Source: PublicInvest Research - 30 November 2016

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