Coastal Contracts will capitalise on its well established and long term business relationships that the company has with its clients to mitigate the deferment of its vessel deliveries from its existing RM1.0 bln orderbook amid the stubbornly weak exploration and deep sea water working environment.
Hence, the compression in margins across both it business segments was inevitable owing to the increased volatility in crude oil prices and uncertainty amongst the oil major players, which led to some restructing on the balance sheet structure and major shift in most oil and gas players' capex decisions.
Consequently, we have also made some amendments to our orderbook replenishment assumption rate for the OSV segment to RM200.0 mln (from RM300.0 mln previously) foir FY17 and FY18 respectively to reflect the poor sentiment across the expectations of multiple oil and gas service providers. Also, our target for the jack up rig/GCSU segment was adjusted to RM100.0 mln (from RM200.0 mln previously) for FY17 and FY18 respectively.
Valuation and Recommendation
We maintain our HOLD recommendation with an unchanged target price of RM1.65 by ascribing an unchanged target PER of 8.0x, to our unchanged FY18 EPS estimate of 20.4 sen per share as our earlier estimates have accounted for the tighter profitability margins.
Meanwhile, Coastal’s near-to-short term earnings visibility remains well underpinned by its sizeable and enviable cumulative orderbook size of approximately RM2.20 bln (RM1.00 bln for its OSV business segment, while the JU GCSU/rig business segment has an orderbook value of RM1.20 bln - with approximately two years of earnings visibility).
Some of the investment risks include the company’s inability to monetise its OSV inventories, which would unnecessarily increase its working capital, reduce its cash conversion cycle and restrict its capital deployment opportunities. Also, a prolonged subdued oil price environment will deter O&G companies from expanding further in the offshore exploration and production activities, thus, affecting the demand for O&G assets such as OSV and JU rigs.
Source: M+ Online Research - 13 June 2016