• Our fair value of MYR1.37 for Wasco is based on 10x FY24F P/E, below the 5-year mean of 11x. We like Wasco for its near-term earnings potential, led by a strong orderbook and tenderbook, on the back of strong FPSO demand and gas development projects. In the longer run, we believe Wasco should be able to ride on the opportunities arising from the global energy transition wave, capitalising on its EPC and pipe-coating capabilities.

• Solid orderbook and bright prospects. As of 1Q23, Wasco’s orderbook was at MYR3.5bn, of which MYR2.5bn is related to the oil & gas (O&G) segment. Key projects include Yinson Azalea Production’s FPSO topside modules work and the provision of line pipe thermal insulation services for the East African Crude Oil Pipeline (EACOP). Its tenderbook is valued at c.RM5bn presently, with a 50:50 split between the pipe coating and EPC businesses across different regions including the Middle East, Australia, Africa and Malaysia. With gas being the key source of energy, we believe Wasco is well-positioned to capitalise on the rising opportunities from gas development projects globally. Note that Wasco started a new pipe-coating plant in Qatar in 2021. We have been guided that the plant has executed some jobs and continues to bid for new projects. This year, Wasco is aims to achieve a stronger job replenishment rate in 2H23, with several smaller projects to be secured. As such, we think it will be able to maintain its orderbook value above MYR3bn by year-end.

• Opportunities in energy transition. After delivering the first onshore substation for a solar farm in Taiwan and front-end engineering design (FEED) work for Lion Energy’s first hydrogen and refueling station in southeast Queensland, Wasco is still executing the USD36m EPC job for Ineos New Energy Plant in Scotland. Contracts like these in its track record are essential for Wasco to clinch more relevant projects in the growing renewable and clean energy industry. It is also eyeing pipe-coating jobs for carbon, capture and storage (CCS) projects. According to management, there is approximately 4,100km in pipelines for carbon capture and storage projects planned between 2023 and 2027. This could trasnlate to an estimated USD1bn worth of potential pipe-coating job opportunities.

• Decent growth. We expect Wasco to register 29-36% YoY earnings growth in FY23-24, led by higher billings from existing contracts with the possibility of better contributions from its JVs and associate firms, while higher O&G upstream activities should lead to better maintenance works and higher vessel demand. Net gearing has improved gradually to 0.76x in 2022, from 0.96x in 2020, on the back of stronger operating cash flow. Downside risks: i) Lower work orders from clients, ii) softer oil prices, which could limit clients’ spending, and iii) higher operating costs.

Source: RHB Research - 17 Jul 2023