Results Highlights

Coastal Contracts registered a net profit of RM12.7 mln for the April to June 2016 quarter (vs. RM34.8 mln for the April to June 2015 quarter), while its revenue came in at RM200.9 mln (+22.4% Y.o.Y). The decline in earnings was due to lower margins realised from its shipbuilding division and impairment losses on its receivables.

For the 18 months ending June 2016, the company recorded a cumulative net profit of RM167.1 mln on the back of a revenue of RM2.0 bln. While the surge in financial performance was due to the bareboat charter income derived from the charter of its Jack Up Gas Compression Services Unit (JUGCSU), this was, however, slightly below our expectations as its cumulative net profit only accounts for 91.0% of our forecast (RM183.7 mln). Also, there is no comparables for this period as Coastal has changed its financial year-end from December to June.

Since its listing, Coastal has always and will continue to take a prudent stance in its balance sheet and cash flow management as the company intends to conserve the appropriate amount of cash balances to serve as financial cushion if the weak O&G sector sentiment prolongs. This also bodes well with the company’s M&A strategies and the recent venture into Indonesia’s LNG regasification and storage segment is a testament of its prudent strategic decisions.

Prospects

The OSV segment remains sluggish as its existing orders was deferred in 1H2016 owing to the subdued market sentiment in the exploration and deep-sea water activities. However, Coastal strives to carefully juggle the delivery of its vessels, shipyard handling and working capital management in order to create a win-win solution for all its stakeholders, given the long-term business relationships that Coastal has established with its customers over the years.

Nonetheless, the management intends to direct their focus into growing the O&G asset ownership and charter (Jack Up Gas Compression Service Unit) and LNG regasification and storage service market in Indonesia (Floating LNG Regasification Unit & Floating LNG Storage Unit) that could underpin Coastal’s growth plans in the foreseeable future. Moving forward, we believe that this move will serve as a good diversification effort against the bleak outlook for the OSV segment. Our orderbook replenishment rate for the OSV segment, meanwhile, remains at RM200.0 mln for FY17 and FY18 respectively, which should reflect the poor sentiment across the OSV subsector. For the jack up GCSU segment, our target of RM100.0 mln worth of orderbook replenishment is unchanged for FY17 and FY18 respectively.

Valuation and Recommendation

We maintain our HOLD recommendation with a target price of RM1.65 as Coastal’s near-to-short term earnings visibility is still well underpinned by its sizeable and enviable cumulative orderbook size of approximately RM2.30 bln (RM837.0 mln for its OSV business segment, while the JU GCSU business segment has an estimated orderbook value of RM1.50 bln).

Our target price is arrived by ascribing a target PER of 8.0x to our unchanged FY18 EPS estimate of 20.4 sen per share as we made no changes to our earnings estimate after accounting for the sharp decline in the OSV segment, where the impact will be cushioned by the positive spillover from the other business ventures – O&G asset ownership and charter & LNG regasification & storage services.

Some of the investment risks include management’s misguidance and inability to monetise its OSV inventories, which would unnecessarily increase its working capital, reduce its cash conversion cycle and restrict its capital deployment opportunities. Also, a prolonged subdued oil price environment will deter O&G companies from expanding further in the offshore exploration and production activities, thus, affecting the demand for O&G assets such as OSV and JU rigs.

Source: M+ Online Research - 8 Sep 2016