WASEONG (5142) - WAH SEONG CORPORATION BERHAD - Poised For Long-term Earnings Visibility





Wah Seong's pipe-coating business, Wasco Coatings Europe B.V., an indirectly wholly-owned subsidiary of Wah Seong incorporated in the Netherlands, bagged an award from Nord Stream 2 AG. The job is for the provision of concrete weight coating and storing of more than 200,000 pipes for the Nord Stream 2 Project. No contract value has been announced at this juncture as the contract is still subject to final negotiations and only to be signed in the coming weeks. Pipe deliveries to concrete weight coating facilities are planned to start in September 2016, with the coating process to start at the beginning of 2017. Our Outperform recommendation on Wah Seong continues to be reaffirmed, with a TP of RM0.94 pegged to 8x PE and FY17F EPS of 11.7sen. Considering the main concern for the Group is the current lack of contract replenishments, this new award for the duration of approximately 3 years would provide longer term earnings visibility to the Group, thus further limiting its downside risks. We maintain that Wah Seong's performance has been affected by the oil price sentiment and not due to its execution capabilities, and is poised for better prospects 4QFY16 onwards. The Group continues to be the leading contender in the pipe-coating space when the O&G market begins to see its recovery.

The award involves concrete weight coating and storing of about 2,400 km of pipes. The plans for the pipelines are two parallel 48-inch lines, roughly 1,200km, each with 27.5billion cubic metres of natural gas annual capacity. The pipelines will start from the south-west of St Petersburg, a Russian port city on the Baltic Sea and end at the German coast of Greifswald. The duration of the project is expected to commence September 2016 to the third quarter of 2019. Due to the contract being in the final negotiation stages, we have yet to account for its contributions to the Group. The earnings profile, we assume, would be bell-shaped with the bulk of works to be done in 2017 and 2018. Based on the Nord Stream 2 project's total capital expenditure of c.EUR8.0bn, we believe the portion earmarked for Wah Seong should be relatively sizeable as well. The Group's pipe-coating contract with Statoil for the 482km-long Polarled gas pipeline in Norway was already valued at RM611.3m, and this current Nord Stream 2 Project is an estimated 1200km per pipeline.

The Nord Stream 2 Project is a direct connection between the world's largest gas reserves in Russia and the gas transmission system of the European Union (EU). The new Nord Stream 2 pipeline will deliver gas from North Russia to the German coast near Greifswald. We understand that the Nord Stream 2 Project is to complement the existing gas transportation routes: the pipelines through Ukraine, the Yamal-Europe and Nord Stream 1 pipelines and the pipelines planned through the Black Sea are all complementary supply routes to the EU which serve the long-term energy security of the continent.

Nord Stream 2 shareholding parties is planned to be an international consortium of 6 major companies PJSC Gazprom (50%), the German companies Uniper SE (10%) and BASF SE/Wintershall Holding GmbH (10%), the Anglo-Dutch Royal Dutch Shell plc (10%), the Austrian OMV AG (10%) and the French Engie S.A (10%).

Source: PublicInvest Research - 11 Jul 2016

WASEONG (5142) - WAH SEONG CORPORATION BERHAD - Poised For Long-term Earnings Visibility
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