Wah Seong upgraded to ‘Hold’

by NUR HAZIQAH A MALEK / graphic by TMR

HONG Leong Investment Bank Bhd (HLIB) has upgraded its ‘Sell’ rating on Wah Seong Bhd to ‘Hold’ with an increased target price (TP) from 65 sen to 70 sen.

HLIB analyst Sean Lim Ooi Leong said the research house has lifted its financial year 2019 (FY19) annual replenishment to RM800 million from the current RM500 million level after taking into consideration the contracts secured by Wah Seong.

“Additionally, management reiterated their bullish stance on future prospect particularly in Australia, which could come in soonest by end-2019 and increase our FY19, FY20 and FY21 earnings by 8%, 14% and 13% respectively on higher replenishments,” he said in a research note yesterday.

Lim added that Wah Seong’s share price had retraced 21% since the downgrade in February.

“This is making current levels more palatable from a risk-to-reward standpoint. All in all, we upgrade our rating on the counter to ‘Hold’ from ‘Sell’,” he said.

Lim also said Wah Seong had secured multiple small oil and gas (O&G) related works in the first quarter of 2019 (1Q19) to offset the outstanding orders’ decline from Nord Stream 2 (NS2) project.

“The current orderbook still stood at RM1.09 billion as of 1Q19, which is a slight drop from RM1.11 billion level from 4Q18,” he said.

Based on the research house’s back of envelope calculation, Wah Seong’s orderbook implies that the O&G segment has secured circa RM370 million worth of new contracts, which were not disclosed during the quarter.

The jobs consist of local pipe coating works, additional pipe manufacturing orders and maintenance work in Australia.

Lim added that activities are picking up for Wah Seong, and did not discount the possibility of more small projects going forward.

As for the NS2 project, he said Wah Seong had also recognised RM308 million revenue in 1Q19 to achieve 92% completion rate.

“The remaining below RM200 million and 20% of its existing orderbook will be recognised between 2Q19 and 3Q19,” he said.

As such, Lim said Wah Seong will only start to negotiate the additional incentive with the client upon project closure based on several benchmarks that were agreed earlier on.

“We estimate the maximum amount for the additional payout for NS2 should not be more than 1% of the total contract value of RM27 million and (it) is expected to be paid out by the 4Q19 to the 1Q20,” he added.