WASCO expects the demand for pipe coating to sustain its upward trajectory, driven by an anticipated increase in global pipeline construction. Contract terms have also become more favourable amidst stiff competition for qualified contractors. We raise our FY24-25F net profit forecasts by 7% and 11%, respectively, lift our TP by 15% to RM1.70 (from RM1.48) and upgrade our call to OUTPERFORM from MARKET PERFORM.

We came away from WASCO’s investor day feeling more upbeat on its medium-term outlook. The key takeaways are as follows: -

1. The company expects the pipe coating industry to benefit from the production ramp-up of oil and gas, as well as investment in new energy (carbon capture and hydrogen) infrastructure by oil majors globally. GlobalData projects that 196,130 km of new trunk oil and gas pipelines will be laid from now until 2030. This represents a significant increase compared to the 102,000 km of new pipelines laid over the past seven years, according to GlobalData. This bodes well for WASCO, as higher pipeline capex leads to higher demand for pipe coating.

2. WASCO expects its strong group EBIT margin to sustain into FY24- 25F as its clients offer more favourable contract terms for its pipe coating and upstream module fabrication services amidst stiff competition for qualified contractors (of which the number has shrunk over the last decade on a prolonged slowdown in the upstream services market). We expect its EBIT margin to average close to 8.1% in FY24F compared to 7.4% in FY23.

3. It also guided for strong growth prospects for its bioenergy services division over the medium term on brisk demand for boilers and steam turbines. The government has set a target of total biomass installed capacity of 998MW by end-2035, up from 507MW in 2020. Additionally, it has noticed a shift towards the preference for higher-efficiency boilers and steam turbines for power generation, prompted by sustainability awareness.

Forecasts. We upgrade our FY24-25F earnings forecasts by 7% and 11%, respectively, after imputing higher revenues and EBIT margin assumptions of 8.1% and 9.4% respectively (from 7.5% and 8.2% previously).

Valuations. Correspondingly, we raise our TP by 15% to RM1.70 (from RM1.48), having rationalised our valuation basis to SoP (from straight PER). While maintaining our 10x FY25F PER valuation basis for its pipe-coating business (consistent with the average of upstream oil & gas service providers of similar size), we now carve out its bioenergy services division and value it at 13x FY25F PER (consistent with the average historical forward PER of boiler makers). 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 due to: (i) it being a beneficiary of the robust tender pipeline for global pipe coating and EPC projects, (ii) its thrust into contracting work for sustainable projects (e.g. EPC for Kasawari carbon capture & storage project and providing steam turbines and boilers for green energy production), and (iii) its position as the largest market player in the global pipe-coating market with reduced competition following sector consolidation. Upgrade to OUTPERFORM from MARKET PERFORM as value has emerged.

Risks to our call include: (i) delays and cost overruns from poor project execution, (ii) slow orderbook replenishment, and (iii) surge in opex due to an inflationary cost environment.

Source: Kenanga Research - 6 Jun 2024