WASCO: Analyst Sees Value Amidst Operational Challenges, Recommends Buy

TA Securities has initiated a “BUY” recommendation for the company, setting a target price of RM0.25, representing a potential upside of 25.0% from its last traded price of RM0.20. This positive outlook comes despite recent operational headwinds that saw the company’s core PATAMI (Profit After Tax and Minority Interest) decline in the second quarter of financial year 2025 (2QFY25).

Performance Review

The company reported a 2QFY25 core PATAMI of RM17.3 million, marking a significant decrease of 40.7% quarter-on-quarter and 48.7% year-on-year. This performance resulted in 1HFY25 core earnings of RM46.4 million, which lagged behind both TA Securities’ and consensus full-year forecasts, at 35.4% and 40.3% respectively. The subdued earnings were primarily attributed to weaker margins stemming from an unfavourable project mix, particularly within the energy services segment where lower-margin engineering jobs constituted a larger proportion (46% in 2Q vs. 40% in 1Q).

Order Book and Operational Challenges

Contract conversion rates remained sluggish, with only RM0.58 billion secured in new contracts during 2QFY25, a marginal increase from RM0.53 billion in the preceding quarter. This is considerably low compared to the record-high tender book of RM12 billion as of end-1QFY25. The company’s overall order book also saw a slight depletion, dropping to RM2.2 billion from RM2.4 billion in 1QFY25. These figures underscore ongoing delays in project award cycles and a cautious sentiment among oil majors, who are deferring new capital expenditure commitments due to heightened uncertainty surrounding long-term demand for fossil fuels, global tariff actions, and slowing industrial activity. These macroeconomic headwinds could prolong conversion timelines, impacting near-term earnings visibility.

Strategic Focus and Future Outlook

Despite the challenges in its traditional segments, the bioenergy segment demonstrated stable performance, recording RM64.8 million in revenue for 2QFY25. Turbine sales for 1HFY25 increased to 37 units, up from 33 units in 1HFY24, alongside growth in boiler project wins. This steady contribution supports the company’s strategic move to spin off its bioenergy arm, Wasco Greenergy, positioning it for long-term green energy growth. The proceeds from a potential IPO of Wasco Greenergy are expected to fund expansion, unlock value, and enhance focus on this high-growth sector. While near-term earnings forecasts have been revised downwards by an average of 30% for FY25F-FY27F to reflect a normalised pace of contract wins, TA Securities believes the current valuation presents a compelling entry point, considering the underlying assets and strategic pivot towards bioenergy. The “BUY” recommendation is predicated on the view that these operational challenges are temporary and the company’s long-term growth drivers remain intact.