KUCHING: Wah Seong Corporation Bhd’s (Wah Seong) pipe job win from Statoil Petroleum AS Norway (Statoil) was well within analysts’ expectations.
In a filing on Bursa Malaysia, Wah Seong announced that further to the group’s announcement made on December 4, 2015 in relation to the award of contract by Statoil to its pipe coating business unit for the total Scope of Coating Work for the Johan Sverdrup Export Pipeline Project (JoSEPP), the group’s business has been further awarded a contract valued at approximately US$18.23 million (equivalent to RM73.87 million) for the provision of pipe shipping and related services for (JoSEPP).
“The contract involves shipping of pipes to a port at west coast of Norway and subsequent offloading,” Wah Seong said. “The actiivty is expected to commence in the second quarter of 2017 and be completed by first quarter of 2018.”
According to Hong Leong Investment Bank Bhd (HLIB Research), assuming a conservative profit before tax (PBT) margin of 10 per cent, financial impact of the job win to the group is estimated to be at RM7.4 million.
HLIB Research noted that this would only help to partially sustain the group’s oil and gas (O&G) revenue base.
“Further contract win is a big positive but is deemed within expectations as it is still within our orderbook replenishment assumptions.
“The win is also regarded as insignificant for us to further increase our orderbook replenishment assumption,” the research arm said.
Meanwhile, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) found that this latest job win was an unsurprising development given that pipe shipping services is part of the supporting services provided by Wah Seong within the pipe coating industry’s value chain.
Kenanga Research was positive on the contract award as it increased Wah Seong’s depleting order book of RM715 million as of the first quarter of 2016 (1Q16) by 10 per cent and demonstrated the group’s good client relationship with the Norwegian oil and gas multinational.
The research arm noted that should Wah Seong is able to deliver quality services, the pipe shipping income will only start contributing in 2Q17 upon completion of pipe coating.
Therefore, it was deemed to be within Kenanga Research’s order book replenishment assumption of RM400 million (excluding the recent contract award from Nord Stream 2) in financial year 2017 (FY17).
That said, the research arm suspected the earnings before interest and tax (EBIT) margin for pipe shipping is less attractive than pipe coating, probably at below 10 per cent especially in this tight budget environment amid industry downturn.
On a side note, HLIB Research highlighted that Wah Seong’s latest tenderbook is about RM5 billion largely concentrated on O&G jobs.
In view of the low oil price and spending cut by exploration and production (E&P) player, the research arm remained cautious on the orderbook replenishment rate.
“On the other hand, profit margins would be weaker for its O&G pipe coating division amid cost rebasing by its clients to weather the downturn,” the research arm said.
HLIB Research noted that Wah Seong’s associates comprising of Alam Maritime joint venture (JV) and Petra Energy continue to be a drag on its earnings due to slowdown in activities.
Meanwhile, the research arm pointed out that the plantation business in Congo remains a drag to Wah Seong’s earnings and is not expected to breakeven until 2018 as it is still going through gestation period for its young oil palm trees to mature.
All in, HLIB Research maintained its earnings forecast and ‘sell’ rating on the stock. The research arm also maintained its target price at RM0.58 based on unchanged nine-fold FY17 price earnings ratio (PER).
The research arm said that margin compression is still a concern and Wah Seong’s JVs focused on O&G offshore support vessels (OSV) asset business would still be a drag.
On the other hand, Kenanga Research also maintained its FY16/17E earnings forecast at this juncture as the contract award was within the research arm’s order book replenishment assumption while the recently announced contract win of 2,400 kilometres (km) pipe coating job from Nord Stream 2 has yet to be finalised.
The Nord Stream 2 contract, in Kenanga Research’s view, remained a strong re-rating catalyst to Wah Seong with the potential contract size of circa RM2 billion, approximately three times the group’s current order book.
Hence, Kenanga Research retained its ‘outperform’ call with an unchanged target price of RM0.86 per share.