• Stay NEUTRAL and MYR1.55 TP, 5% upside and c.3% yield. Post Wasco’s Investor Day, despite our optimism regarding the group's earnings prospects in the medium term, we believe current valuation has factored in its orderbook level of c.MYR3-3.5bn. We see further upside if Wasco is able to deliver much stronger replenishments coupled with better margins and unlock value on its existing assets. We are also pleasantly surprised by the potential resumption of dividend payments after three years.

• Pipe coating opportunities. Wasco Group CEO and Managing Director Gian Carlo Maccagno highlighted that the pipe coating market is expected to grow to USD10.6bn by 2027 from 2021’s USD8.3bn, representing a 6.8% CAGR. Wasco has identified significant line pipe demand from the carbon capture, utilisation, and storage (CCUS) market in Europe and Asia Pacific, with CO2 infrastructure potentially spanning 6,700-7,300km as part of the EU's strategy to achieve climate neutrality. Being the market leader, this provides a significant opportunity for more job wins, as evident by the existing two CCUS-related projects – Kasawari (Malaysia) and Porthos (Netherlands). Other opportunities come from the hydrogen market.

• Engineering division. Following the strong 27% revenue CAGR in the past three years, Wasco continues to see robust job opportunities – premising on the need to expedite capex spending and upgrade aging oil and gas facilities to sustain efficient production following the underinvestment between 2014 and 2022. The group has tendered for early production facilities and sees more non-O&G job flows, including modularised data centres. The capacities tightness also suggests that the bargaining power has now switched back to the contractors, and Wasco is in a position to capitalise on this given its strong in-house EPC capabilities and delivery track record.

• Bioenergy. Wasco’s focus on the bioenergy value chain is opportune given the sector’s growth, evidenced by the National Energy Transition Roadmap (NETR), where it outlines the target to increase bio refinery capacity to 3.5bn litres and biomass power generation capacity to 1.4GW by 2050.

• Orderbook outlook. Wasco is comfortable maintaining an orderbook in the MYR3-3.5bn range. Hence, it will be more selective with future job bids, prioritising projects that offer higher returns and lower risks. The group has a tenderbook size of MYR7.3bn and identified an addressable market size of MYR13bn. This positions Wasco for a steady outlook over the next five years.

• Neutral. With no changes to estimates, our TP remains MYR1.55, pegged to 11x FY25F P/E (at its 5-year mean) with a 4% ESG discount applied as its ESG score of 2.8 is below our country median. We note the group's aspiration to achieve net zero emissions for its scope 1 and 2 emissions by 2026. To offset current emissions, it has subscribed to green electric tariffs (GETs) and planted 160k trees, with plans to plant 1m trees in the future. This would potentially warrant an upside to its ESG score.

Source: RHB Research - 6 Jun 2024