Wasco set for higher earnings on better margins

PETALING JAYA: Wasco Bhd’s earnings in the fourth quarter of 2023 (4Q23) could surprise on the upside on the back of better-than-expected margins with more pipe-coating works having been carried out.

CGS-CIMB Research said the energy infrastructure group also has a healthy tender book of RM7bil to underpin sustained growth, with awards for several key projects in Malaysia, Qatar and the United Kingdom expected towards the second half of 2024 (2H24).

Wasco delivered strong results for the nine-month period of 2023 (9M23), with normalised net profit increasing by 61% year-on-year (y-o-y) to RM60.2mil, driven primarily by a turnaround in its associates and joint ventures and lower taxes.

Revenue for 9M23 grew by 11% y-o-y, driven by the run-down of its record order backlog during the 9M23 period.

Earnings before interest, taxes depreciation and amortisation margin came in lower as some of its larger and newer projects were still in the early stages, where margins are typically lower, the research house said in a report.

“We gather from management that a lot more actual pipe-coating works were carried out in 4Q23 such as for the Rosmari-Marjoram and North Field Production Sustainability projects, which, implies that margins and hence earnings should show sequential improvements in the final quarter,” it said.

CGS-CIMB Research said its 2023 net profit forecast of RM84mil implies 4Q23 net profit of RM23mil, flattish from the RM23mil-RM24mil reported in 2Q23 and 3Q23.

The research firm added that its 2023-2025 net profit forecasts are currently 14% to 17% above Bloomberg consensus estimates.

“We forecast group net profit to grow by a further 35% y-o-y in 2023, 24% in 2024 and 10% in 2025, following the strong turnaround over 2020-2022, premised on the execution of its near-record order backlog of RM3.6bil as at 3Q23, an expansion in margins and the potential of new contract wins.”

Of its current RM7bil tender book, about 20% are for domestic jobs, with the balance from overseas contracts.

“Management guides that the bulk of new job awards is expected to be back-loaded towards 2H24, with key project rollouts expected from Malaysia, Qatar and the United Kingdom,” it added.

Although Wasco’s share price has risen some 66% over the past 12 months, CGS-CIMB Research said valuations remain attractive, with the stock trading at 8.6 times 2024 price-to-earnings ratio.

“This is below its 10-year mean of 10 times, which we find attractive for an oil and gas stock with encouraging growth prospects, strong earnings visibility backed by its massive order backlog and rising return on equity (ROE).

“At current levels, we estimate that the market is pricing in a sustainable ROE of 12.3% for Wasco, below our 2024-2025 average ROE forecast of 14%, which implies that the group’s earnings growth potential has yet to be fully reflected in its share price,” it added.