Investment Highlights

• Stock idea. Coastal Contracts (Coastal) started as a marine transportation vessel chartering business in Sandakan, and gradually becoming an established shipbuilder, ship-repairer and charterer with a fleet comprising a liftboat, a jack-up rig with gas compression capability, an anchor handling tug supply vessel, a platform supply vessel, 3 subsea maintenance vessels, an accommodation work barge and 3 sets of harbour tugs/barges.

• The group’s extensive global network in selling vessels has allowed Coastal to sign its first bareboat charter for Agosto 12, a jack-up with a gas compression service unit, for Petroleos Mexicanos (Pemex) at the Canterell field, Gulf of Mexico, commencing August 2016 over 8 firm years with 4 annual extension options.

• A milestone was achieved last year when the group secured a 50% equity stake in 2 joint-venture projects with the Nuvoil group of companies to provide engineering, procurement, construction, operation and maintenance services (EPCOM) in Mexico worth a game-changing combined value of RM4.8bil.

• This first contract, worth RM259mil over 32 months for a 180mmscfd capacity gas sweetening Perdiz Plant at Pemex’s onshore Ixachi field, Tierra Blanca, Veracruz, Mexico has commenced operation in July 2021. Subsequently, on 27 December 2021, Coastal further entered into a service agreement with its JV company to provide RM4.5bil EPCOM for the EMC Papan plant and its related infrastructure over 10 years, the largest contract ever secured by the group.

• Including short-term investments, Coastal’s healthy balance sheet has substantive net cash reserves of RM217mil as at 30 Sep 2021. While the group is unlikely to raise equity to fund existing projects, we understand that Coastal will tap onto external borrowings for its Mexican project.

• Key risks. We do not discount private placement exercises for capex and working capital requirements if Coastal secures large assets such as FPSOs or even larger EPCOM contracts in Mexico given that the government aims turn Ixachi into the country’s largest onshore production field. Also, Coastal is increasingly exposed to geopolitical and operational risks Mexico, which has an S&P foreign currency credit rating of BBB vs. Malaysia’s A-.

• With a robust locked-in outstanding net order book of RM2.9bil (18x FY21 revenue), Coastal’s prospects have radically transformed with its new Mexican ventures. Assuming a pre-tax margin of 15% on the construction cost of RM1bil for EMC Papan and RM100mil for the Perdiz facility, we estimate that JV contribution could more than double FY21 earnings, which translate to compelling prospective single-digit PE valuations.

Source: AmInvest Research - 25 Jan 2022