This article first appeared in The Edge Malaysia Weekly on April 29, 2024 - May 5, 2024

WASCO Bhd is among the stocks that have benefited from the positive sentiment in the oil and gas (O&G) industry. Its share price has soared 46% so far this year, boosted by its improved earnings performance. The current escalated crude oil prices have also prompted investors to relook at the O&G counters, including Wasco, that they shied away from for many years.

Wasco, formerly known as Wah Seong Corp Bhd, saw its core profit expand to about RM75 million in the financial year ended Dec 31, 2023 (FY2023) from RM62 million in FY2022.

Its group CEO and managing director Giancarlo Maccagno sees a continued growth pattern in Wasco’s earnings and its ability to declare dividends — something that had not happened often in recent years.

The O&G pipe-coating and infrastructure expert, whose past projects include the €600 million coating works for the Russia-Germany Nord Stream 2 gas pipelines, is bullish on the broader energy industry in both the short and long term.

In Wasco’s key markets, like the UK’s North Sea, Africa and the Americas, the demand for energy infrastructure has exceeded that in the previous oil boom of the 2000s, Maccagno tells The Edge in an interview.

“Today is our time, clearly because we are experiencing demand for our services and products that I’ve never seen before in my entire life,” says the chieftain, who will be 60 this year and has spent more than two decades in the O&G industry.

In the spotlight are energy security risks brought about by a decade of underinvestment, coupled with geopolitical tensions involving the world’s largest hydrocarbon producers like Russia and Iran, as well as consistent growth in energy demand, he explains.

“Before the [Russia-Ukraine] war, nobody wanted to touch some of those fields in the UK’s North Sea. It is all coming back [now] ... if you look at the jobs pipeline in the North Sea, it is just unbelievable.”

This is on top of new horizons such as carbon capture projects, as well as biomass-related initiatives, which contributed one-fifth to Wasco’s profit last year.

Having been through the severe downturn, which was characterised by oil prices below US$40 per barrel, a dearth of jobs and difficulties in getting financing, Wasco understands the importance of being disciplined when it comes to bidding for jobs. The group currently has an order book of RM3.1 billion, of which RM2.6 billion is from the energy sector alone — a stark contrast from the multi-year low of less than RM500 million at one point during the Covid-19 pandemic.

With rising infrastructure demand globally, Wasco can afford to be more selective in its tenders. According to Maccagno, the group is in a position to negotiate for a clause that would have its clients bear the risk of any cost increment caused by fluctuations in raw material prices.

Wasco has also been able to secure milestone payments from clients, which allows it to be cash flow neutral, even when it undertakes sizeable projects, he adds.

“While our current liabilities have stayed at the same level in the last three years, our revenue has increased almost twice during the period,” says Maccagno.

“Our Tanzania project, a US$300 million job, has zero financing. Positive cash flow from day one,” he cites an example. “We do not secure [such terms] all the time, but we are making a lot of progress.”

Within Wasco, which builds pipelines and process modules for facilities such as FPSOs (floating production storage and offloading vessels), things are in place for growth. Besides, the nearly three-decade-old outfit is transforming itself to be less asset-heavy — a move to free up financial resources.

Wah Seong Malaya Trading Co Sdn Bhd is the largest shareholder of Wasco with a 32.56% stake, followed by Tan Kim Yeow Sdn Bhd (TKY SB) with 8.63% and Midvest Asia Sdn Bhd (5.38%).

Wah Seong Malaya is the investment vehicle of the Tan family that founded the IGB group.  

Datuk Seri Robert Tan Chung Meng, the son of the late Datuk Tan Kim Yeow, is the chairman of Wasco.  He is deemed to have an interest in the company through Wah Seong Malaya and TKY SB.

As more jobs come in, Wasco is finding ways to improve efficiency by executing multiple jobs at a time without the need to secure additional yard space. Its yards have reached an internal capacity utilisation of 80%.

“We are studying the supply chains to see if we can [execute a task faster] by getting several yards [not owned by Wasco] to undertake the components while we do the assembly. Yes, you may have to sacrifice a few per cent of margin compared with if you do it internally, but you do not have to invest [if you outsource],” says Maccagno.

“We are not selling our yard [capacity] anymore. We are selling our engineering and project management capabilities.”

Maccagno points to existing investments, including in key sites such as Batam, Indonesia, which it acquired in 2022. Wasco has spent US$30 million on the plant and has about 350 engineers on its payroll. Other recent investments include its pipe-coating plant in Qatar.

He believes that besides the yard, the large number of engineers is a key asset.

Several clean-ups were conducted during the Covid-19 pandemic. 

Wasco made an impairment of RM164.05 million in FY2020, the bulk of which was linked to building, plant and equipment related to a pipe-coating project in Europe.

Another RM39.54 million was written off in FY2022 in relation to its investment in Canada-based Evraz Wasco Pipe Protection Corp following international sanctions on “certain linked individuals” at the height of the Russia-Ukraine war, said Wasco’s annual report.

There is more in the works. While its net gearing had improved to 0.36 times at end-2023 from 0.68 times a year earlier, the group’s current liabilities of RM1.71 billion exceeded its current assets of RM1.62 billion by RM85.22 million. 

Its short- and long-term borrowings stood at RM652.05 million and RM50.92 million respectively, against a cash pile of RM410.3 million, while its retained profits were RM144.17 million.

The higher current borrowings is because Wasco is using revolving credit for its long-term projects during the low interest rate environment, which is cheaper to finance, says Maccagno.

“While it’s short term technically, the investments are long term in nature ... We are looking at some refinancing,” he adds. He expects its current liabilities to go below its current assets in this quarter or the next.

Closing at RM1.46 last Thursday, Wasco’s shares are trading at a forward price-earnings ratio of 11.68 times based on FY2024 consensus earnings per share (EPS) forecast of 12.5 sen among the five analysts covering the company.

The stock is nearing analysts’ target prices after the rally over the past four months, while it has already exceeded two analysts’ fair value of RM1.40. The analysts’ target prices range from RM1.40 to RM1.70.

Wasco posted a net profit of RM108.4 million or 14 sen per share for FY2023 — the strongest since FY2017, when its net profit stood at RM113.02 million. Its profit in FY2023 was lifted by the gain on disposal of non-core assets amounting RM23.09 million.

For FY2024, the consensus net profit forecast is lower year on year at RM96.75 million. However, this is an improvement from FY2023 when its net profit would have been RM79.9 million excluding the divestment gain. 

Wasco had consistently paid dividends until FY2016. In the last seven years, it only declared a dividend of 0.4 sen per share in FY2020.

Riding the industry up cycle, Wasco could again reward shareholders with regular dividends after a three-year lull, according to Maccagno, who has been with the group since 1993 and took on his current role in July last year.

“It is my goal [to declare a dividend]. We are studying our cash flow for the next five years in order to come out with at least a dividend policy and direction that is achievable. But we will announce a dividend payment subject to board approval starting as early as this year,” he says.

A growing number of companies have stepped up their efforts in terms of environmental, social and governance (ESG) compliance over the past five years. Wasco, however, started back in 2013, hence it is confident of turning net zero in two years.

Maccagno notes that the group started tracking its carbon emissions in 2013. He does not deny that any expansions will add to its carbon emissions, but he is confident that Wasco can achieve its net zero target through efforts such as solar panel installations, green electricity tariff subscription and planting more than one million trees in the near future.

Meanwhile, the group is seizing business opportunities that arise from ESG compliance activities, such as emissions monitoring and reduction. Some 20% to 25% of its energy business is involved in green projects like pipe coating for carbon capture facilities, fabrication for wind farms and substations for solar projects, says Maccagno.

This segment raked in a gross profit of RM217.28 million in FY2023 and it is expected to grow further. However, it is only about 7% of the segment’s outstanding RM2.6 billion order book, according to analysts covering the stock.

Besides, the group has exposure to non-conventional projects like the hydrogen and refuelling station in Queensland, Australia, and Ineos New Energy Plant in Scotland, also tied to hydrogen.

It is worth noting that 18% of its FY2023 segmental profit came from the bioenergy services segment, where Wasco is essentially involved in the development of biomass power plants for plantation companies. It has operated this business for three decades. Empty fruit bunches of oil palm are the feedstock for these biomass power plants.

“We have helped install 2.5mw of bioenergy plants in Indonesia and Malaysia ... we can take the next step [to expand this segment]. Everyone wants green energy,” says Maccagno, who does not discount Wasco having its own biomass plant if it can secure a regular supply of feedstock.

Given the country’s large oil palm plantation industry, he sees the biomass power plant as a natural move for green energy generation. There are roughly 50 million tonnes of empty fruit bunches a year.

“What I can promise to the market is that when they come and buy our product, there is net zero impact on the environment. I can go to the oil companies and tell them, ‘You must buy from me’ … it’s good for business as well’,” he says.

Wasco has taken other steps to realign its operations, such as by selling its non-core assets.

“We’ve been a bit distracted by diversifications [in the past]. I personally believe that, provided that the industry we operate in has opportunities, there is no reason to diversify,” says Maccagno.

He notes that Wasco has to stay focused when strategising its future plans.

“If you are a global player in the different sectors of the energy market — renewables, gas, oil — the demand for these will not die. I think where we operate, there are ample opportunities in the next 10 to 15 years. We should concentrate on our strengths, technology and know-how to grab those opportunities,” he says.

There is no doubt that vibrancy has returned the O&G industry, even though things are not as good as during the previous oil boom in the first half of the 2010s.  How high O&G stocks climb, apart from crude oil prices, would depend on investors’ willingness to pay premium valuations. 

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