Wasco Bhd’s earnings growth potential has yet to be reflected in its share price despite the group’s relatively strong share price performance over the past 12 months, which saw an increase by 66%, according to CGS-CIMB.
“Valuations remain attractive, with the stock trading at 8.6x 2024F P/E (below its 10-year mean of 10x), which we find attractive for an O&G stock with encouraging growth prospects, strong earnings visibility backed by its massive order backlog and rising return on equities (ROEs).
“At current levels, we estimate that the market is pricing in a sustainable ROE of 12.3% for Wasco, below our 2024F-2025F 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 said today in its Company Note today (Jan 23).
Wasco also remains one of the research house’s top picks in Malaysia. It maintained its ADD rating for the group, with an unchanged GGM-based TP of RM1.40.
“Potential re-rating catalysts are better-than-expected earnings delivery and conversion of its massive tender book into new contract wins while the downside risks include failure to replenish its orderbook and cost overruns for jobs on hand,” it said.
Wasco delivered strong results for 9M23, with normalised net profit increasing by 61% year-on-year (YoY) to RM60.2 million, driven primarily by a turnaround in its associates and joint ventures and lower taxes.
“While 9M23 revenue grew by 11% YoY, driven by the run-down of its record order backlog during the first nine months, the earnings before interest, taxes, depreciation, and amortization (EBITDA) margin was lower by 1.2% points to 10.4% YoY.
“(The reason is that) some of its larger and newer projects were still in the early stages, where margins are typically lower,” the research house said.
Besides that, CGS-CIMB gathered from management that a lot more actual pipe-coating works were carried out in 4Q23F such as for the Rosmari-Marjoram and North Field Production Sustainability (NFPS) projects.
“(This), in our view, implies that margins and hence earnings should show sequential improvements in the final quarter. Our 2023F net profit
forecast of RM84 million implies 4Q23F net profit of RM23 million, flattish from the RM23 million to RM24 million reported in 2Q23 and 3Q23.
“Our 2023F to 2025F net profit forecasts are currently 14 to 17% above Bloomberg consensus estimates,” it said.
The research house forecasted group net profit to grow by 35% YoY in 2023F, 24% in 2024F and 10% in 2025F, following the strong turnaround over 2020-22, premised on the execution of its near-record order backlog of RM3.6 billion as at 3Q23, an expansion in margins,
and potential new contract wins.
“We see plenty of orderbook replenishment opportunities with its tenderbook currently at RM7 billion, equally split between its pipeline services and engineering, procurement and construction (EPC) segments.
“Approximately 20% of the group’s current tenders 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 2H24F, with key project rollouts expected from Malaysia, Qatar and the UK,” it added.
