WASCO's 1QFY24 earnings met expectations. Its 1QFY24 core net profit jumped 84% YoY due to strong pipe-coating orders and improved cost efficiency. Its pipe-coating business will continue to be buoyed by strong upstream activities. We maintain forecasts and TP of RM1.48 but downgrade our call to MARKET PERFORM from OUTPERFORM after the recent run-up in its share price.

WASCO’s 1QFY24 core profit of RM24.7m (after excluding EI of RM30.5m disposal gain of asset held for sale and RM1.8m reversal of impairment on receivables) met expectations at at 26% of both our full- year forecast and the full-year consensus estimate. No dividends were declared in the quarter as expected.

YoY. its 1QFY24 revenue rose 21% driven by higher oil & gas pipe coating orders, partially offset by lower activity levels at its bioenergy services segment (that supplies equipment and spare parts to the plantation sector). Its core net profit surged by a steeper 84% on improved cost efficiency and stronger contributions from associates and JVs.

QoQ, its revenue declined by 20% due to, we believe, the normal quarterly fluctuation in pipe-coating orders and decreased sales of equipment and spare parts to the plantation industry due to reduced activities during the festive season. Its core profit only declined by 14% cushioned by lower finance cost and improved contributions from associates and JVs.

Outlook. With an order book valued at RM3.2b, the company anticipates an increase in oil & gas pipe-coating orders and higher EBIT margins due to more favorable contract terms. The group has secured a project in Qatar as part of the NFXP Offshore Compression Project, involving the installation of new assets in Qatar's North Field in 1QFY24 for duration of six months. We expect the group to maintain its earnings momentum driven by higher work orders and margin expansion.

Forecasts. Maintained.

Valuations. We maintain our TP at RM1.48 pegged to unchanged FY25F 10x PER, 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) it being a beneficiary of the robust tender pipeline for global pipe coating and EPC projects, (ii) 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), and (iii) it being the second largest market player in the global pipe coating duopoly. However, we believe that the majority of the medium-term growth from its energy services division has been largely priced in. Downgrade to MARKET PERFORM from OUTPERFORM.

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 - 31 May 2024