This article first appeared in The Edge Financial Daily on May 18, 2018
Wah Seong Corp Bhd
(May 17, RM1.59)
Maintain hold with a target price (TP) of RM1.48: Wah Seong Corp Bhd’s first quarter of financial year 2018 (1QFY18) core net profit of RM26 million was within our expectations but below consensus estimates. Core net profit increased significantly year-on-year (y-o-y) mainly due to the ramp-up of the Nord Stream 2 (NS2) pipe coating contract and higher contribution from the industrial trading segment.
1QFY18 core net profit came in at RM25.7 million, accounting for 24.8% of our and 22.9% of consensus estimates.
Y-o-y, the core net profit increased threefold, mainly due to the ramp-up of the NS2 pipe coating contract and higher contribution from the industrial trading segment, partially offset by a weaker margin in the renewable division.
Quarter-on-quarter, the core net profit decreased 34.2%, mainly due to lower contribution from the O&G and renewable divisions, partially offset by a stronger performance from the industrial trading segment. We understand that the completion rate of the NS2 contract currently stands at around 40% to 41%. To recap, the NS2 contract is worth RM3 billion and is expected to complete in 3QFY19.
Wah Seong’s current order book stands at RM2.51 billion (1.0 times FY17 revenue cover), of which 85% is from the oil and gas (O&G) segment. NS2 takes up a significant portion of its order book, and cost management of the project is essential to the group’s profitability.
Its tender book is at around RM5.8 billion, increasing from RM5 billion in 4QFY17. The bulk of the tender book is from the O&G segment, which can potentially help to sustain revenue momentum beyond 2019 upon expiry of the NS2 project.
The impact from the change of government is still unclear at this juncture. However, there is potential delay risk from the Trans Sabah Gas Pipeline, which will be funded by a soft loan from the Export-Import Bank of China. The project may be subject to review by the new federal government. As a result, the award of the pipe-coating contract, for which we deem Wah Seong a strong contender, may be delayed.
We maintain our forecast for FY18 and FY19. We introduce our FY20 earnings forecast of RM105.5 million. We maintain our “hold” call with an unchanged TP of RM1.48 pegged at unchanged 11 times FY18 price-earnings ratio. — Hong Leong Investment Bank Research, May 17