This article first appeared in The Edge Financial Daily on November 18, 2019
Wah Seong Corp Bhd
(Nov 15, RM1.25)
Maintain buy with an unchanged target price (TP) of RM1.50: The third quarter for financial year 2019 (3QFY19) results are scheduled for release next week. We expect it to report a weaker core net profit of RM10 million to RM12 million in 3QFY19 (down 8% to 24% quarter-on-quarter [q-o-q]), which would bring its nine months of financial year 2019 (9MFY19) core earnings of RM42 million to RM44 million (down 43% to 46% year-on-year[y-o-y]). We think the q-o-q weakness will mainly be driven by declining earnings contribution from its flagship project, Nordstream 2 (NS2), which will end in 4QFY19. With its 4QFY19 expected to turn in weaker vis-à-vis 3QFY19, we have lowered our financial year 2019 (FY19) core earnings to RM52 million (down 13%) but keep our FY20-21 earnings estimates unchanged.
While the weak FY19 is a given, focus should be on FY20, as its turnaround will be tangible from both the order book and earnings perspectives. We see Wah Seong Corp Bhd capitalising from the resurgence in offshore engineering and fabrication orders, particularly for process equipment modules, as it rides on the strong floating production, storage and offloading (FPSO) orders pipeline. This alone would lift its order backlog above RM1 billion (current: RM938 million), which could add about US$300 million to US$450 million to its order book, extend its visibility over the two years (FY20-21) and be a prominent earnings driver in FY20.
We expect its 60:40 Qatar pipe-coating operations to contribute to FY21-23, leveraging on the North Field Expansion (NFE) project. The project could be as significant as NS2. While the estimated contract value may be half of NS2’s (€600 million), it would enjoy improved gross margins (sub-30% versus 12%), effectively a similar earnings impact as NS2.
Whilst we cut FY19 earnings by 13% as we expect a weaker 3QFY19/first half of 2019 (1H19), we remain positive on Wah Seong’s prospects. Order book visibility is rising and Wah Seong is a key beneficiary of higher: i) engineering and fabrication; and ii) pipe-coating works. The former will lead growth in FY20 while the latter will feature prominently from FY21. Our earnings estimates are ahead of consensus. Our TP is unchanged, pegged at 10.7 times FY21 price-to-earnings, at its three-year mean to factor in a pickup in industry order book visibility. — Maybank IB Research, Nov 14