WASCO's 9MFY24 earnings were above our expectations due to a surprise in oil & gas division margins but came within consensus.

We maintain our view that its order book (at RM3b) will grow significantly in the coming months due to an increase in tenders worldwide. Post recent correction, it is currently trading close to - 1SD of its mean at 6x FY25F PER. We adjust FY24/25F earnings to reflect higher margins and lift our SoP TP by 8% to RM1.83 (from RM1.70) and maintain our OUTPERFORM call.

Its 9MFY24 core profit of RM90.3m (after excluding EI of RM60.8m disposal gain of asset held for sale, RM11.3m impairment on receivables and RM21.9m impairment on PPE) came above our expectation at 80%, but largely within consensus at 73%, of full-year forecast. The major reason for the positive surprise was stronger-than-expected oil & gas division margins.

YoY, 9MFY24 revenue rose 4%, underpinned by higher oil & gas pipe coating orders from key projects such as Yinson, Agogo, Schneider East African Crude Oil Pipeline engineering works (EACOP), NFXP, and the EACOP pipe coating portion. Core profit surged 63% YoY, on improved margins in the oil & gas division stemming from better contract terms and stronger contributions from associates and JVs.

QoQ's revenue declined by 10%, reflecting lower work recognition in the oil & gas division due to contract timing. However, this was partially offset by stronger contributions from the bioenergy division, supported by higher boiler sales. Its core profit declined by 9% due to lower margins from oil & gas division (RM15m after excluding impairment impact) due to forex losses but the negative impact was offset by stronger bioenergy division's margins and lower interest cost.

Outlook. With an order book valued at RM3b, the company anticipates an increase in work orders, the company expects it to grow materially in end FY24F or 1QFY25F as the tenders finalise. At this juncture, the group is tendering for RM9b worth of projects (50% in oil & gas, and 50% in bioenergy) and expects order book replenishment momentum to pick up in the coming months. While its Yinson Agogo and NFXP projects are coming to a tail-end (98% and 92%, respectively), the company is still at its early stages of Kasawari CCS (15% completion) and substation projects in the Middle East (1% completion).

Forecasts. We increase FY24-25F earnings by 11-7% after assuming a higher gross margin of 16% (from 15%) with order book replenishment assumption of RM2.7b for FY25, which is reasonable as it implies a 30% success rate.

Valuations. Correspondingly, we lift our SoP-driven TP by 8% to RM1.83 (from RM1.70) 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 for: (i) the robust tender pipeline for global pipe coating and EPC projects, (ii) its exposure in bioenergy division which could be a proxy to growing demand for, and (iii) the recent sell-down in its shares due to macro weakness and PETROS news which was overdone in our view.

Maintain OUTPERFORM.

Source: Kenanga Research - 29 Nov 2024