WASCO's FY23 results beat our forecast. Its FY23 core net profit eased 6% on elevated finance cost. A new wave of pipe coating jobs in market will boost margins and earnings visibility of players including WASCO. We raise our FY24F net profit forecast by 16%, lift our TP by 58% to RM1.48 and upgrade our call to OUTPERFORM from MARKET PERFORM.

WASCO’s FY23 core net profit of RM78m (after excluding EI of RM2.3m forex gain, RM23m gain on disposal, RM3.7m impairment reversals) beat our forecast by 14% but met market expectations. The variance against our forecast came largely from stronger-than-expected margins realised, particularly, at its pipe coating business.

YoY, its FY23 revenue rose 8% driven by higher work orders for pipe coating jobs and sales in the bioenergy services segment. However, its core profit fell by 6% primarily due to elevated finance cost.

QoQ, its core net profit surged 38% on a flattish top line thanks to more favourable contract terms and hence margins for certain pipe coating jobs.

Outlook. Amidst a firm crude oil outlook, a new wave of pipe coating jobs will buoy the market, boosting margins and earnings visibility of players including WASCO. Already, WASCO has recently secured the Bindu project from Exxon Mobil for offshore pipelines in Terengganu, and the Rosebank Surf project for a coating job in the United Kingdom, boosting its outstanding order book to RM3.1b.

We expect its order book to rise further with new jobs with more favourable contract terms given the tight pipe coating capacity in the market. We assume contract wins of RM2.5b in FY24 based on its current tender book of RM7b Forecasts. We raise our FY24F net profit forecast by 16% after reflecting a higher EBIT margin assumption of 9% for its pipe coating division (from 6%). We introduce our FY25F numbers which project a 23% jump in earnings underpinned by a job win assumption of RM2.7b.

Valuations. Correspondingly, we lift our TP by 58% to RM1.48 (from RM0.94) by rolling forward to FY25F 10x PER (previously 9x), consistent with the average of upstream oil & gas service providers of similar size. There is no adjustment to our TP based on ESG given a 3- star rating as appraised by us (see Page 4).

Investment case. We like WASCO due to: (i) its strong market position, being one of the two players in the global pipe coating duopoly, (ii) the robust market for pipe coating services and EPC projects amidst a firm crude oil price, and (iii) its thrust into contracting work for sustainable projects (e.g. solar farm in Taiwan, hydrogen and refuelling station in Queensland, and Ineos New Energy Plant in Scotland). Upgrade to OUTPERFORM from MARKET RPERFORM.

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 - 28 Feb 2024