We came away from COASTAL’s 5Q16 briefing feeling largely NEUTRAL as enquiries by clients for vessel deliveries deferral and price reduction are no surprises to us under the current weak environment. Whilst its shipbuilding business continues to face margin pressure amidst slower vessel sales, its second jack-up rig is still proceeding as planned but market should remain challenging in the near term. Balance-sheet-wise, COASTAL is still relatively healthy with minimal net gearing of 0.04x compared to industry peers’ average of 0.53x. All in, we maintain MARKET PERFORM call with TP at RM1.61 pegged to CY17 PER of 8.0x.
No progress on new projects amidst weak operating environment despite oil prices rebounding to above USD50/bbl. Last quarter, management guided that COASTAL is looking to diversify into new regional project potentially worth RM500, spanning 3-4 four years. However, the deal still remains at preliminary stage without much progress in the past quarter given the economics and unattractive return of the project.
Revenue from JUGCSU recognised in 1Q16. We understand that its first Jackup Gas Compression Service Unit (JUGSU) to Pemex had been successfully hooked-up and will proceed to commissioning stage in Mexican waters. However, COASTAL has already started recognising the bareboat charter income in 1Q16 by billing its Mexican counterpart. We believe the revenue recognised will remain as receivables until Pemex successfully hit first gas, which is targeted by next month.
Deferral enquiries emerged. During the quarter, COASTAL received request from clients to defer vessel delivery for 6 to 12 months and to reduce selling prices. This came as no surprise to us as the industry continued to be shadowed by vessel oversupply issue resulting from low offshore activities. In our view, COASTAL most probably will allow these deferrals without any substantial penalty in order to preserve client relationships. On the other hand, COASTAL will take delivery on its second jack-up rig should they secure a contract.
Healthy net cash position but orderbook replenishment risk persists. Given the quiet OSV market amidst the industry downturn, its current orderbook of RM1.0b likely to last till 2HCY17. Balance-sheetwise, COASTAL is back to minimal net gearing of 0.04x from net cash position of RM34m in 4Q16. It is still healthy as compared to the industry average of 0.53x.
No changes to our forecast as we have anticipated vessel deliveries from clients. Having said that, we do not discount further earnings risk of: (i) discount given to PEMEX on its JUGSU, and (ii) vessels are sold at losses. Based on our calculation, a 10% reduction in JUGSU’s charter rate will drag down our FY17/18E earnings by 10.6%/11.4%.
Maintain MARKET PERFORM. All in, despite weak outlook from shipbuilding segment, re-rating catalyst could emerge if COASTAL manages to venture into new space by securing sizeable regional projects or new JUGSU contract. Maintain MARKET PERFORM call at TP of RM1.61 pegged to CY17 PER of 8.0x. 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 - 6 June 2016