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Sunday, July 24, 2016

Waseong: Earnings Clarity Ahead

Background

Wah Seong Corporation Bhd ('Waseong") is a major oil & gas service group that provides a wide range of services globally such as highly specialised pipe coating, corrosion protection, drilling supplies as well as EPC, fabrication and rental of gas compressors (as per Wikipedia). Waseong is also a leading distributor and manufacturer of building materials and spiral welded steel pipes for water transmission and infrastructure use.

Recent Development

Waseong has recently secured a project from Nord Stream 2 AG for the new pipeline which will deliver gas from North Russia to the German coast near Greifswald. 

  • This pipeline involves two parallel 48 inch lines, roughly 1,200km each starting from south-west of the Russian port city of St Petersburg on the Baltic Sea and ending at German coast, Greifswald.  
  • The award involves concrete weight coating and storing of approximately 2,400 km of pipes. The project is expected to commence in September 2016 and be completed by third quarter of 2019.
  • Using the earlier Polarled project contract value as a yardstick, KAF-Seagroatt & Campbell Securities gave an estimate for Nord Stream 2 contract to be US$600-US$650mil (RM2.4bil-RM2.6bil). For more, go here and here.
Map of Nord Stream Pipeline

Historical Financial Performance

For the past 6 years, Waseong's bottom-line has been very erratic with a downward bias.This was due to lower profit margins while top-line was maintained at around the RM2 billion mark.


Chart 1: Waseong's last 10 years' P&L

Recent Financial Results

Waseong's revenue had been declining in the last 4 quarters due to the challenging operating environment for oil & gas sector. Waseong reported a loss in QE31/12/2015 due to the recognition of impairment losses on plant and equipment of RM30.3 million during the current quarter. Excluding this impairment, the Group’s profit before taxation would have been RM13.3 million.


Chart 1: Waseong's last 18 quarters' P&L

Financial Position

Waseong's financial position is weak with current ratio at 0.97x and total liabilities to equity of 1.35x.

Valuation

Waseong (closed at RM0.745 last Friday) is now trading at a Price to Book of 0.5x (based on NTA p.s. of RM1.40 as at 31/3/2016). As it was loss-making for the last 4 quarters, its PER is not meaningful.

Technical Outlook

Waseong is in a downtrend line in the past 2 years. This downtrend line will pose a resistance at RM0.85.


Chart 3: Waseong's weekly chart as at July 22, 2016 (Source: Shareinvestors.com)

Waseong nearly tested the low of its 2002 rounding bottom of RM0.60 recently. While there is no sign of a bottom yet, this level of RM0.60 should present a fairly strong support for the stock.


Chart 4: Waseong's monthly chart as at July 22, 2016 (Source: Shareinvestors.com) 

Finally, if we compared the retracement in Waseong's share price vis-a-vis its profit trend, it looks like share price has overshot in the downside. Thus, I believe the Nord Stream pipeline could well be the catalyst for a re-rating of the stock.


Chart 5: Waseong's monthly chart as at July 22, 2016 and last 18-quarter P&L (Source: Shareinvestors.com)

Conclusion

Based on earning clarity from contracts in hand, possible turnaround in earnings and attractive valuation, Waseong could be a good stock for a recovery play. 

Note: 
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, Waseong.

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