Bumper earnings likely for Wasco in coming quarters

PETALING JAYA: Wasco Bhd’s latest US$33.9mil contract win in Africa by Schneider Electric will help to replenish the group’s existing record high order book of almost RM4bil as at June this year, say analysts.

According to Hong Leong Investment Bank (HLIB) Research, the gross margin for this job is estimated to be at the range of 12% to 15% over the course of 17 months.

“Thus, this should contribute positively to Wasco’s bottom line.”

Looking ahead, Wasco is expected to deliver bumper earnings in the coming quarters, said the brokerage firm in a note to clients yesterday.

“This is because the bulk of the projects secured in 2022 are set to enter steep recognition upcycle with most executions being performed in the coming quarters,” added HLIB Research.

Given the positive development, the brokerage firm has revamped its financial model and reintroduced the financial year 2023 (FY23), FY24 and FY25 forecast earnings at RM73.8mil, RM81.9mil and RM88.3mil, respectively, compared with its previous forecasts.

HLIB Research has also maintained a “buy” call on the stock with a higher target price (TP) of RM1.27.

“We like Wasco for its niche expertise of being the largest and one of the only few independent pipe coaters in the world.

“Its position allows it to capitalise on the rising demand for pipe coating services spurred by the ongoing oil and gas upstream capital expenditure upcycle and carbon capture and storage pipeline projects planned for 2023 to 2027, which requires about 4,100km pipeline with total estimated value for pipe coating of more than US$1bil.

Meanwhile, Kenanga Research is positive on Wasco’s contract that has boosted its year-to-date job wins to RM1bil that is on track to meet its full-year assumption of RM1.5bil and its outstanding order book to RM4bil.

“Assuming about 10% net margin for the job (engineering and fabrication jobs typically fall within this range), it implies an average net earnings impact per year of some RM11.3mil,” the research house said.

Furthermore, Kenanga Research believes that the execution risks for the job will be manageable given its past experience in fabrication-related jobs and the complexity of the job is deemed to be lesser compared to the floating production storage and offloading topside module job awarded back in FY22. The research house maintained an “underperform” call on the stock with a TP of 89 sen pegged to an unchanged nine times FY2 price-to-earnings ratio, in line with the average valuation of its closest global peer Shawcor.

“Overall, our call is mainly due to cost pressures on operations due to ongoing supply chain challenges and earnings growth already largely priced in by the recent strong move in its share price and geopolitical factors,” said Kenanga Research.

The risks to its call include stronger-than-expected project margins, larger-than-expected order book replenishment and a sharp uptick in crude oil prices.

Public Investment Bank (PublicInvest) Research has retained a “neutral” call on Wasco with an unchanged TP of RM1.

It pointed out that Wasco’s order book stood at all-time high of RM3.9bil as at the second quarter of this financial year (2Q23).

“However, we believe it will be reduced in 3Q23 as it recognises progress billings from key projects,” added the research house.

On a separate note, PublicInvest Research said Wasco’s transformation plan remains on track after it divestment of a non-core asset.”

“Wasco is expected to record one-off net gain of RM31.8mil in 1Q24, after it disposed a freehold plots of land in Klang worth RM40mil on Oct 12. The disposal of non-core assets will enable the group to re-channel its capital and resources to its core businesses, namely energy and bioenergy.

“We also expect the group will close another asset disposal by the end of this year,” added the research house.

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