Wah Seong expected to record stronger quarters ahead
KUCHING: Wah Seong Corporation Bhd’s ( Wah Seong) earnings the first half of 2017 (1H17) earnings came in either below or within expectations, but analysts are expecting stronger quarters ahead.
As per a filing on Bursa Malaysia, Wah Seong’s net profit for the current period to- date ended June 30, 2017 amounted to RM12.83 million, up from a net loss of RM7.69 million in the previous year’s corresponding period.
Wah Seong’s 1H17 core net profit (CNP) of RM15.2 million came below the research arm of Kenanga Investment Bank Bhd’s ( Kenanga Research) expectations, accounting for only 21 per cent and 19 per cent of its and consensus full-year estimates.
According to Kenanga Research, this was after stripping off reversal of inventories amounting to RM0.6 million, receivables write- off of RM0.2 million and net forex gain of RM0.7 million largely attributable to weaker-than- expected joint venture (JV) and associate earnings as well as the scheduled plant closure in Finland in June for three weeks due to the summer holidays.
“Despite so, we still expect strong quarters ahead underpinned by escalating production for Nord Stream 2 project,” it said.
No dividend was declared versus 0.5 sen in the second quarter of 2016 (2Q16), but the research arm expected dividend at 30 per cent pay-out ratio to be declared in 2H17 along with better earnings.
Meanwhile, Wah Seong’s cumulative first six months of financial year 2017 (6MFY17) earnings was still within the research arm of MIDF Amanah Investment Bank Bhd’s ( MIDF Research) and consensus full year estimates as it expected earnings to be tail-heavy in FY17.
Kenanga Research noted that Wah Seong had started the group’s double shift commercial production at its Finland plant at end of May this year.
Despite so, we still expect strong quarters ahead underpinned by escalating production for Nord Stream 2 project. Kenanga Research
“However, the plant stopped production as scheduled for three weeks in June due to the summer holidays,” the research arm said.
“On the other hand, the coating plant in Mukran, Germany has commenced its commercial single shift production in July and subsequently ramped up to double shift in late August.”
Thus, Kenanga Research expected stronger earnings in 3Q17 and subsequently full earnings contribution from Nord Stream 2 coating activities in 4Q17.
“Meanwhile, instead of getting conventional financing, the project will be funded entirely by Nord Stream 2 whereby a supplementary agreement is likely to be signed in the near term.”
“As of 2Q17, Wah Seong has received circa 145 million euros from the client.”
On forecasts, Kenanga Research cut FY17E earnings by seven per cent to RM69.2 million factoring lower JV and associate earnings and slight delay in Nord Stream 2 project due to the three weeks plant closure.
Following that, the research arm increased FY18E earnings by six per cent accounting for higher pipe- coating activities from Nord Stream 2.
“All in, Wah Seong’s order-book remains comfortable at RM3.7 billion, of which 93 per cent are attributable to the oil and gas segment,” it said.
As the research arm believed the 600 million euro Nord Stream 2 project will emerge as the main earnings driver, Kenanga Research maintained its ‘outperform’ call with an unchanged target price at RM1.10 per share pegged to an unchanged valuation metric of 0.8-fold FY18E price to book value ( PBV).
On the other hand, MIDF Research made no change to its earnings estimates at this juncture.
MIDF Research also maintained its ‘neutral’ stance on Wah Seong.