Key takeaways from COASTAL’s analyst briefing: (i) The group is still in discussion for Perdiz Plant and JUGCSU’s contract extension; (ii) Papan Plant’s gas processing volume is gradually increasing in line with capacity expansion of Ixachi field; (iii) Management expects to recover majority of provision for delay penalty. We trim our FY23/FY24/FY25 earnings forecasts by 7.6%/1.5%/0.9% respectively after lowering our utilisation rate assumptions for both Perdiz Plant and Papan Plant. Maintain Buy with a lower TP of RM1.90/share based on sum-of-parts valuation.

Perdiz Plant and JUGCSU’s Contract Extension Still in Discussion

According to management, Coastal Contracts Berhad’s (COASTAL) Mexican joint venture (JV) is currently discussing with Pemex for a 2-year contract extension for Perdiz Plant, expected to finalise around Jan 2024. The indicative value of contract extension is c.USD70-80mn. Additionally, Pemex is considering a 5-year contract extension with liquefied petroleum gas (LPG) processing capability added to the plant, which we believe is a positive sign that Pemex will likely extend the Perdiz Plant’s operation and maintenance contract with the group’s Mexican JV.

Recap that Pemex recently requested for the temporary suspension of Agosto Jackup Gas Compression Service Unit (JUGCSU) from 27 Nov 2023 onwards while the discussion for extension of existing contract is ongoing. The contract was supposed to end in Feb 2024. The outcome of the discussion is still pending and is expected to conclude within 2-5 months. COASTAL may consider requesting for compensation for the suspension of charter before the end of the contract, depending on whether the group is satisfied with the terms of contract extension.

Gradual Increase in Papan Plant’s Processing Volume

Limited by Ixachi field’s gas production capacity, the gas from the field continues to be diverted from Perdiz Plant to Papan Plant due to the latter’s ability to process additional products such as naphtha and LPG. Papan Plant’s latest daily processing volume stabilised at 200-220mmscfd (67-73% utilisation rate), an increase from c.180mmscfd in 3QFY23 to 5QFY23 as more wells are ready in Ixachi field. Perdiz Plant’s current daily processing volume is around 130mmscfd (72% utilisation rate), stable since 5QFY23. As Pemex drills new wells and increases the production capacity of Ixachi field, the utilisation rate of Papan Plant is expected to ramp up by 1HFY24. Meanwhile, Perdiz Plant’s processing volume will increase once Papan Plant reaches maximum utilisation rate.

Expect to Recover Majority of Provision for Delay Penalty

Recall that COASTAL recognised a provision for delay penalty in achieving critical construction milestone for Papan Plant amounting to USD21mn (c.RM97mn) in 4QFY23. The group believes that the provision should be USD3mn as most of the delay is mainly due to force majeure events such as harsh weather conditions. If application is unsuccessful, COASTAL is liable up to USD30.4mn. Nonetheless, the group is confident of recovering majority of the provision and expects the outcome within a month.

Impact

We trim our FY23/FY24/FY25 earnings forecasts by 7.6%/1.5%/0.9% respectively after lowering our utilisation rate assumptions for both Perdiz Plant and Papan Plant as the ramping up of processing volume is slower than our expectations.

Valuation

Following the change in our earnings forecasts, we lower our TP to RM1.90/share (previous RM2.08/share) based on sum-of-parts valuation. Maintain Buy.

Source: TA Research - 27 Dec 2023