• Upgrade to BUY from Neutral, new MYR1.86 TP from MYR1.55, 66% upside. 1H24 core earnings exceeded expectations, driven by stronger margins and a lower effective tax rate. The 3-month share price decline has made Wasco more appealing – it is now trading at an attractive 6.6x FY25F P/E. Orderbook growth of 15% QoQ to MYR3.7bn further supports the group’s positive outlook.

• Beat estimates. 1H24 core earnings of MYR62.2m (2.1x YoY), came above our and Street’s expectations at 59% and 55% of full-year earnings. This was attributed to lower than-expected tax expenses and better margins.

• Results review. 2Q24’s net profit of MYR36.5m – after stripping away one- off items (including impairments and FX loss) – increased 42.1% QoQ and more than doubled YoY. This was driven by the increase in revenue (+9.1% QoQ, +32.2% YoY) as a result of higher activities due to project executions in the orderbook. Cumulatively, 1H24 core earnings increased two-fold – driven by the higher topline (+11.4% YoY), and coupled with better margins and improved performances of WSC’s JVs and associates.

• Outlook. As of 2Q24, WSC’s orderbook stands at MYR3.7bn (+15% QoQ), bolstered by the addition of MYR1.1bn in new projects and variation orders. Notable recent wins include a substation project in the Middle East valued at c.MYR750m, as well as the Troll and Kasawari carbon capture & storage or CCS pipeline jobs. Key ongoing energy projects include the East African Crude Oil Pipeline or EACOP (c.45% complete) and Yinson Agogo, with an 83% completion rate (expected to be finalised by year’s end). The group's tenderbook remains strong at c.MYR7bn, with increased activity observed in Europe, while opportunities in the Middle East and Asia-Pacific regions also remain robust. Additionally, WSC has observed increasing interest in biomass energy boilers, a sector it plans to actively pursue in alignment with Malaysia’s National Energy Transition Roadmap or NETR.

• Upgrade to BUY. We lift FY24F-26F earnings by 21%, 20%, and 20% to factor in stronger margins and lower tax expenses. Our TP is raised to MYR1.86 and is pegged to an unchanged 11x P/E (at its 5-year mean) and inclusive of a 4% ESG discount – this is based on WSC’s 2.8 ESG score vs the 3.0 country median. After a 28.7% drop in share price over the last three months, the stock is now attractively valued at 6.6x FY25F P/E.

• Key downside risks include a decline in work orders from clients, softer oil prices that limits clients’ spending, and higher operating costs.

Source: RHB Research - 30 Aug 2024