We are positively surprised by the earlier-than-expected maiden income recognised from its Jackup Gas Compression Service Unit (JUGCU) chartered to PEMEX. However, the 15M16 results are deemed within expectations as the slower-than-expected vessel deliveries are offset by bareboat charter income from JUGCU. Earnings are trimmed to account for weaker margins. Reiterate MARKET PERFORM call with lower TP of RM1.61 pegged to 8.0x CY17 PER.
Deemed within expectations. The 15M16 results are deemed as within expectations with core net profit of RM166.4m making up 84%/88% of our 18-month estimates and consensus’ as the slower-than-expected vessel deliveries were offset by unexpected maiden contribution from its first JUGSU to Pemex.
Slower deliveries. 5Q16 net profit declined by 43% YoY to RM16.4m from RM63.0m in 1Q16 due to a lower number of vessels sold (1 unit in 5Q16 vs 5 units in 1Q16) and margin compression in shipbuilding and ship repair segment. Sequentially, 5Q16 net profit strengthened by 23% from RM13.3m in 4Q16 largely attributable to improvement in vessel chartering segment (bareboat charter income from the charter of JUGCU), turning around to register PBT of RM5.0m from a loss of RM1.2m despite a lower number of vessels sold (2 units in 4Q16).
Cumulative YoY comparables are not available due to the changes in financial year-end. Earlier-than-expected contribution from JUGCU. This is a positive surprise as we were guided earlier on that there could be some delay in HUC work before COASTAL could recognise the bareboat charter income. The JUGCSU is currently being commissioned in the Gulf of Mexico for PEMEX, and is slated for enhanced oil recovery activities in the second half of 2016. Recall that the charter contract spans a period of eight years, with an option to extend for an additional four years. We estimate the project to contribute RM120m to COASTAL’s topline.
Orderbook replenishment risk persists. Despite having long-term recurring income from vessel chartering, we believe COASTAL is still facing orderbook replenishment risk and vessel delivery risk as clients may opt to defer their orders. In addition, some vessels may be sold at slight losses to recoup cash, which will dampen its margins.
Cut earnings forecasts. We tweaked down FY16E/FY17E earnings by 6%/16% after factoring in: (i) lower gross margins on shipbuilding segment to 14% from 17% previously, (ii) lower vessel deliveries in FY17E, but (iii) higher earnings contribution from the jack-up gas rig for FY16E. Meanwhile, FY18E earnings of RM99.5m is introduced assuming: (i) RM400m orderbook replenishment, and (ii) full utilization from its JUGSU unit.
Keep MARKET PERFORM. Post earnings downgrade, we roll over our valuation base-year to CY17 from CY16 pegging to an unchanged PER of 8x. Our new target price is now RM1.61 from RM1.76 previously. MARKET PERFORM call reiterated given its net cash position of RM66m in 5Q16 vs. industry average net gearing of 0.6x as well as long-term recurring income business model taking off. Downside risks to our call include: (i) lower-than-expected margins and vessel sales, and (ii) delay or cancellation of jack-up rig gas compression unit.
Source: Kenanga Research - 26 May 2016