• Reiterate BUY and MY1.89 TP, 84% upside. 9M24 core earnings exceeded expectations, driven by stronger margins. While we anticipate Wasco to deliver a strong full-year performance, some moderation in margins is expected in the next quarter. Post the recent price downtrend, the stock is currently trading at an attractive 6x FY25 P/E, -1SD of its 5-year mean.

• Another beat. 9M24 core earnings of MYR128.2m (2.9x YoY) came above our and Street estimates at 101% and 107% of full-year forecasts, largely due to better-than-expected margins, and stronger JV and associate contributions.

• Results review. Wasco posted a 3Q24 net profit of MYR66m (+80.8% QoQ, 3x YoY) after excluding one-off items, eg gains on disposal, impairments, and FX losses. This performance was primarily driven by better margins, which offset a 9.5% QoQ (-8% YoY) decline in revenue. Cumulatively, 9M24 core earnings more than doubled, driven by a 4.4% YoY increase in topline revenue, better margins, and improved performances from Wasco’s JVs and associates.

• Outlook. As of 3Q24, the group’s orderbook stood at MYR3bn (-18% QoQ), reflecting project revenue recognition and FX impact from a strengthening MYR during the quarter. Key project updates include near completion of the Yinson Agogo and North Field Expansion or NFXP projects at 98% and 92% completion, as well as the commencement of the Middle East substation project that is slated for completion by mid-2026. During the quarter, Wasco secured additional smaller projects worth a cumulative MYR173m, including an engineering contract from Sulzer Chemtech, which was a positive surprise. The group’s tenderbook increased a significant 37% to MYR9.6bn from MYR7bn in the previous quarter, with a 50:50 split between pipeline and engineering jobs. This robust tender pipeline suggests a strong industry outlook, with further awards anticipated by late this year or early 2025.

• BUY. We raise our FY24F earnings by 22% to account for better margins and stronger JV/associate contributions but maintain FY25F-26F earnings, as we anticipate margins to normalise alongside a slight slowdown in orderbook recognition. Our TP is maintained at MYR1.89, pegged to an unchanged 11x P/E (at its 5-year mean) and inclusive of a 2% ESG discount based on Wasco’s ESG score of 2.9 vs the 3.0 country median. At 6x FY25F P/E, we believe the group’s current valuation is unjustified, given its robust tenderbook and strong prospects.

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

Source: RHB Securities Research - 29 Nov 2024