WASCO’s 1HFY23 results missed expectations due to higher-than-expected opex. Nonetheless, its 1HFY23 core net profit rose 46% YoY driven by broad-based recovery across all segments, particularly, the industrial trading & services division. We cut our FY23F and FY24F net profit by 36% and 22%, respectively, reduce our TP by 8% to RM0.89 (from RM0.97) and downgrade our call to UNDERPERFORM from OUTPERFORM.

1HFY23 below expectations. WASCO’s 1HFY23 core net profit came in at only at 29% and 30% of our full-year forecast and the full year consensus estimate, respectively. The shortfall versus our forecast was primarily attributed to higher-than-expected opex.

Chunky exceptional items excluded from core net profit include gain on disposal of assets held for sale (RM8.2m), net foreign exchange gain (RM7.3m), reversal of impairment of financial assets (RM4.5m), and net reversal of impairment loss on amount owing from JV and associates (RM2.1m), amongst others.

Unfavourable product mix for energy solutions. Its 1HFY23 revenue growth (+10% YoY) was driven by broad-based recovery across all segments, particularly the industrial trading & services division. This was largely due to higher sales volume from the distribution of building materials.

Meanwhile, its core net profit expansion was largely driven by the renewable energy (RE) segment on the back of: (i) higher number of projects executed, and (ii) improved profit margin from the industrial engineering unit. Hence, this more than offset weakness at the energy solutions segment which was dragged by: (i) unfavourable product mix and (ii) lagged profit recognition from ongoing projects. Additionally, lower taxes provided a boost to 1HFY23 bottomline.

Briefing highlights. Key takeaways from WASCO’s analyst briefing include the following

1. The group’s current tender book of RM7b mainly comprises engineering and fabrication projects (at 60% share). Meanwhile, the balance 40% consists of bids for RE projects.

2. WASCO was awarded a pipe coating contract (value undisclosed) from Sarawak Shell in Bintulu, Sarawak. This is for more than 200km of offshore pipelines for the Rosmari-Marjoram project. Phase 1 of this project will commence in Sept 2023 with targeted completion date by June 2024.

3. The group has also secured a contract (value not revealed) from Shell Australia to provide pipe coating services for more than 160km of pipelines at the Crux gas field. It is located in the northern Browse basin offshore north-west Australia. This project will commence in Oct 2023 and targeted for completion by Aug 2024.

Transformation in the works. To recap, WASCO recently effected a name change on 8th June to signal its commitment to sustainability and improve its brand perception on the ESG front. The group has also unveiled its ambitious plans to reach net-zero carbon emission by 2026 via a transformation plan that will see the group shifting its focus to the RE sector. Additionally, the transformation would also entail disposal of non-core assets and merger of similar business segments. In the meanwhile, WASCO’s near-to-medium earnings are anchored by its robust order book that has now increased to RM3.9b (1QFY23: RM3.5b). It mainly comprises of projects in the Energy Solutions Services segment (RM3.5b), followed by RE (RM383.4m), and Industrial Trading & Services (RM58.3m). Key ongoing projects include Yinson’s FPSO Agogo topside modules (completion: 12%) and line pipe thermal insulation services for the East African Crude Oil Pipeline (completion stage: 30%).

Forecasts. We estimate the combined value of the new contracts mentioned above amounted to c.RM350m. Therefore, it falls well within our FY23 orderbook replenishment assumption of RM1.5b for WASCO. However, we cut our FY23F and FY24F earnings lower by 36% and 22%, respectively, to incorporate higher project costs at the energy solutions segment. Following this, our TP is lowered to RM0.89 (from RM0.97) based on unchanged 9x FY24F PER – which implies a 40% discount versus global peer Shawcor to reflect WASCO’s significantly smaller market cap. There is no adjustment to TP based on ESG given a 3-star rating as appraised by us (see Page 4).

The stock is currently trading at a 3-year historical after having rallied by 78% since its recent trough of RM0.55 in Nov-2022. Given potential downside from our TP, and expectations of profit taking in the near term, we downgrade WASCO to UNDERPERFORM (from OUTPERFORM).

We like WASCO due to: (i) it is a beneficiary of the robust tender pipeline for global pipe coating and EPC projects, (ii) its thrust into contracting work for sustainable projects (eg. solar farm in Taiwan, hydrogen and refuelling station in Queensland, Ineos New Energy Plant in Scotland), and (iii) it being the second largest market player in the global pipe coating duopoly.

Risks to our call include: (i) delays and cost overruns from poor project execution, (ii) slow orderbook replenishment, and (iii) surge in opex due to an inflationary cost environment.

Source: Kenanga Research - 25 Aug 2023