Wasco Berhad: A Hidden Gem in the Energy Sector?

Wasco Berhad (KLSE:WASCO), a Malaysian engineering and energy solutions provider, has quietly built a track record of financial improvement amid a challenging sector backdrop. With a stock price trading at a significant discount to its historical norms and peers, the company presents an intriguing investment opportunity. Let's dissect its valuation, fundamentals, and growth potential.

Valuation: A Stock Trading at a Discount

Wasco's current P/E ratio of 5.71 (as of July 2025) is well below its 10-year average of -5.47 (likely a data anomaly, as negative P/E ratios are rare for profitable firms). Even compared to its peers, the metric is compelling. For instance, Dayang Enterprise Holdings Bhd (P/E 7.41) and Dialog Group Berhad (P/E 31.00) trade at higher multiples, while Bumi Armada Bhd (P/E 4.58) is closer. Meanwhile, its Price-to-Book (P/B) ratio of 0.85 sits below both its 13-year median of 0.86 and the industry average of 1.5x. This suggests the market is undervaluing Wasco relative to its equity and peer positioning.

The chart would likely show Wasco's P/E consistently trailing the sector, highlighting its undervalued status.

Fundamentals: Revenue Growth and Strategic Shifts

Wasco's revenue surged 21.8% year-on-year to RM3.18 billion in 2024, driven by strong demand in energy infrastructure projects. Net profit rose 11% to RM166.32 million, while its ROCE (Return on Capital Employed) stayed robust at 21%, despite a slight dip from 24% in 2023. Crucially, the company has reduced its gearing ratio to 0.21x, down sharply from 0.48x in 2023, signaling improved financial discipline.

The firm is also executing strategic moves to future-proof its business. These include:
- Launching ASEAN's first Sustainable & Transition Finance Framework, backed by a USD25 million sustainability-linked loan, which could unlock cheaper capital as it meets ESG targets.
- Expanding into high-margin segments like renewable energy infrastructure via its bioenergy subsidiary, Wasco Greenergy, which is slated for an IPO.
- Diversifying geographically with new facilities in the UK, Indonesia, and Dubai, reducing reliance on Malaysia's volatile energy market.

Dividend Restart: A Positive Sign

After suspending dividends in 2020, Wasco resumed payouts in early 2025 with a 2 sen dividend per share, yielding 2.06% at current prices. While the payout ratio is listed as 0% (due to accounting timing), the decision reflects management's confidence in cash flow stability. This dividend restart could attract income-seeking investors and signal a shift toward shareholder-friendly policies.

Risks to Consider

• Sector Volatility: Energy infrastructure demand is tied to oil prices and geopolitical risks, such as geopolitical conflicts or regulatory changes.
• Execution Risks: The proposed spin-off of Wasco Greenergy and new international facilities must deliver on promised synergies.
• Valuation Gap: The stock's low P/E may persist if earnings growth falters or peers underperform.

Investment Thesis

Wasco's cheap valuation, improving balance sheet, and strategic moves into renewables and international markets position it as a compelling play in the energy sector. While risks exist, the stock offers a high risk/reward ratio for investors with a 3-5 year horizon.

This chart would likely show Wasco's dividend yield rising to competitive levels post-2025 payout, attracting income investors.

Conclusion

Wasco Berhad's stock appears undervalued relative to its fundamentals and growth prospects. With a P/E of 5.71, a P/B of 0.85, and a renewed focus on shareholder returns, the company could see a valuation rerating as its strategic initiatives bear fruit. Investors should monitor execution of the bioenergy spin-off and global market demand for energy infrastructure. For those willing to look past sector headwinds, Wasco offers a rare blend of value and growth in an otherwise pricey market.

Recommendation: Consider a buy with a hold horizon of 2-3 years, targeting a P/E expansion to 8-10x as earnings stabilize. Proceed cautiously if energy sector risks escalate.