We came away from COASTAL’s 4Q16 briefing feeling concerned over its FY17/18E earnings outlook due to its depleting orderbook. Aware of the current challenging environment, management is in talks to secure new projects but within the same sector. While the nature of this new business venture was not disclosed, we believe this is a good move to diversify their current concentrated risk in shipbuilding. Having said that, the core business will continue to face margin pressure amidst slower vessel sales. Balancesheet- wise, COASTAL is still relatively healthy with a net cash position as compared to industry peers having average net gearing of 0.6x. All in, we maintain MARKET PERFORM call with TP at RM1.76 pegged to CY16 PER of 8.0x.
In talks for new projects. We are guided that COASTAL is looking to take on new projects in the region such as Brunei. While the managements are keeping their lips tight on the nature of new contracts which we believe will require a blend of COASTAL’s core expertise and new skills, we came to know that one of the projects is a regional project with a potential contract value of RM500m, spanning over 3-4 years. We also understand that this project requires collaboration from other parties and external funding to execute. No further details were disclosed as the deal is still at preliminary stage and will only materialize earliest end of the year.
Slight Delay in JUGCSU. Its first Jackup Gas Compression Service Unit (JUGSU) to Pemex is currently undergoing commissioning in Mexican waters, and looking to generate recurring income by 2HCY16, slightly slower than initial expectation of 1HCY16. No changes to our forecast as we have already factored the delay into our forecast. Management is confident that they are in good position to secure another gas unit project should this JUGSU is operated successfully.
No further impairment. Recall that COASTAL has made an impairment loss on receivables of RM9.0m and inventories write-down amounting to RM56.7m (>10% of stocks to build) in 3Q16. Although management assured that there will not be any further impairment in the next two quarters, we reckon that there is still impairment risk as we believe the market prices of vessels will fall further due to oversupply.
Not building new vessels and likely to compromise margins for cash. Management guided that the operating environment continues to be tough and net margin for vessel sale has dropped to single digit to 9% in 4Q16 vs. 22% in FY14. Meanwhile, COASTAL has stopped building new vessels and their focus is to let go all the vessels in hand, including RM500m worth of build to stocks, to recoup cash even at a slight loss of c.5% for selective type of vessels. Hence, expect further margin compression in the next few quarters.
Healthy net cash position but orderbook replenishment risk persists. Given the quiet OSV market amidst industry downturn and current orderbook of RM1.2b likely to last till 1HCY17, we believe COASTAL will encounter earnings weakness in FY18 due to slow pick up in vessel sales. Balance sheet wise, COASTAL is back to net cash position of RM34m in 4Q16 from a minimal net gearing of 0.06x in 3Q16 which is healthy vs. industry average of 0.6x.
Maintain MARKET PERFORM. All in, we feel that the near-term outlook remains sluggish, especially in FY18 when the remaining orderbook dries up. Re-rating catalyst could emerge if COASTAL manages to venture into new space and secure sizeable regional projects. Maintain MARKET PERFORM call at TP of RM1.76 pegged to CY16 PER of 8.0x.
Source: Kenanga Research - 8 Mar 2016