Categories: MarketsNews

Massive order backlog positions Wah Seong for strong growth

The firm’s orderbook has witnessed a remarkable resurgence, reaching RM3.5b 1Q23, just 5% below its all-time high in 1Q17 

by RUPINDER SINGH 

WAH Seong Bhd is poised for significant growth fuelled by its massive order backlog. CGS-CIMB Securities Sdn Bhd (CGS-CIMB Research) has initiated coverage on Wah Seong, highlighting the company’s solid pipeline of jobs and robust earnings prospects. 

With a near-record orderbook and a strong turnaround in recent years, the research house said Wah Seong is well positioned to capitalise on the growing demand for its services. 

Having evolved into a global energy solutions provider since its inception in 1999, Wah Seong boasts a presence in 17 countries. The company operates through three key divisions: Energy solutions, renewable energy (RE) and industrial trading. 

These divisions encompass a wide range of services, including pipe coating; pipe manufacturing; engineering, procurement, and construction (EPC) services; specialised equipment for biomass power plants; and trading and distribution of building materials. 

Massive Order Backlog to Fuel Growth

According to CGS-CIMB Research, Wah Seong’s orderbook has witnessed a remarkable resurgence, reaching RM3.5 billion in the first quarter of 2023 (1Q23), just 5% below its all-time high achieved in 1Q17. 

Over the past 18 months, it said that the company has secured size-able contract wins across its core pipe-coating and EPC services. 

This robust order backlog, combined with a recovery in margins and potential new contract wins, is expected to drive Wah Seong’s earnings growth. 

CGS-CIMB Research forecasts a 35% year-on-year (YoY) increase in net profit for 2023, followed by 24% growth in 2024 and 10% growth in 2025. 

These projections outperform Bloomberg consensus estimates, indicating the market has not fully priced in Wah Seong’s improved growth prospects. 

Moreover, Wah Seong’s valuation presents an attractive opportunity for investors. 

Trading at just 6.3 times 2024F price-earnings ratio (P/E), the stock commands a steep 38% discount to its 10-year mean of 10.1 times. This discounted valuation, coupled with the company’s strong growth outlook, improving earnings visibility and rising return on equity (RoE), suggests the potential for a re-rating, said CGS-CIMB Research. 

It said that Wah Seong’s global presence and diversification position it for substantial growth across various markets. 

Notably, Wah Seong has identified Qatar as a key focus market, capitalising on the country’s massive capital expenditure plans to raise its liquefied natural gas (LNG) production capacity. 

To tap into this opportunity, it noted that Wah Seong has established a new pipe-coating plant in Qatar and has already secured significant contracts, including the North Field Production Sustainability (NFPS) project and the North Field Expansion (NFXP) project. 

Australia and the North Sea are also identified as potential growth markets. 

Expansion into RE 

In addition to its core operations, it said that Wah Seong is strategically expanding into RE sector. The company aims to capitalise on the growing demand for e-house and substation fabrication works in both conventional oil and gas (O&G) and RE industries. 

It noted that Wah Seong has already delivered its first onshore substation for a solar farm in Taiwan and is exploring opportunities in wind farms and data centres. 

CGS-CIMB Research said Wah Seong’s conscious efforts to pivot towards sustainability-related projects are evident in its execution of two hydrogen-related jobs in Australia. It also noted that Wah Seong’s growth prospects extend beyond its existing operations. 

The global energy transition agenda, with a focus on carbon capture and storage (CCS) facilities, presents a significant opportunity for the company, it said. 

Several planned CCS projects from 2023 to 2027 are expected to require approximately 4,100km of pipelines, representing a value of around US$1 billion (RM4.38 billion). Given its established track record globally, Wah Seong is well positioned to participate in these projects, said CGS-CIMB Research. 

With its strong order backlog and expected margin recovery, CGS-CIMB Research said Wah Seong’s earnings are anticipated to strengthen in the coming quarters. 

Revenue recognition from major projects such as the East African Crude Oil Pipeline (EACOP) and the NFXP project will contribute significantly to Wah Seong’s financial performance, it said. 

CGS-CIMB Research said the pipe-coating revenue from the EACOP project is scheduled to commence in September/October 2023, while the NFXP contract is expected to gain momentum in 3Q23. These projects, along with other upcoming ventures, will further bolster Wah Seong’s revenue and earnings. 

Strengthening Balance Sheet

Furthermore, CGS-CIMB Research noted that Wah Seong has made substantial efforts to strengthen its balance sheet. 

Over the years, the company has significantly reduced its net gearing from a high of 110% in 2016 to 72% in 2022. 

With the projected strong earnings growth, CGS-CIMB Research expects the balance sheet to continue strengthening in 2023, ultimately turning net cash positive by 2025. 

The research firm initiated coverage with an ‘Add’ rating and a target price (TP) of RM1.40 for Wah Seong. 

CGS-CIMB Research values Wah Seong based on the Gordon growth methodology, applying a sustainable RoE of 13.9%, a weighted average cost of capital (WACC) of 11.3% and a long-term growth rate of 5%. 

This valuation approach yields a fair price-to-book value multiple of 1.4 times, resulting in a TP of RM1.40 per share. 

At this TP, it said that Wah Seong would trade at 10.5 times 2024F P/E, before falling to 9.5 times in 2025F, reflecting the company’s strong growth outlook and rising RoEs. 

Starting June 12, the company will be traded and quoted under its new name of Wasco Bhd. 


  • This article first appeared in The Malaysian Reserve weekly print edition
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