Results Highlights

• Coastal Contracts’ 1QFY17 net profit plunged 86.9% Y.o.Y to RM3.1 mln, mainly due to a substantial decline in vessel deliveries (only one vessel was delivered during the quarter vs. 10 units in 4QFY16), higher financing cost and increase in effective tax rate. Revenue for the quarter tumbled 91.7% Y.o.Y to RM76.2 mln.

• Both the reported earnings and revenue came below our estimates, accounting to just 1.9% and 3.8% of our previous full year FY17 net profit and revenue forecast of RM167.1 mln and RM2.01 bln respectively.

• Segment wise, the ship building and repair segment’s pretax loss stood at RM11.2 mln vs. a pretax profit of RM24.1 mln in the previous corresponding quarter, as the weak vessel sales were not able to offset the fixed overhead cost, coupled with lower foreign exchange gained in the previous corresponding quarter. Meanwhile, the vessel chartering segment posted a pretax profit of RM19.8 mln vs. a pretax loss of RM47,000 in the previous corresponding quarter, due to improvement from the bareboat charter of its Jack-Up Gas Compression Service Unit (JUGCSU).

• Despite its earnings weakness in recent quarters, Coastal maintained a prudent stance in its balance sheet with a net gearing of 0.1x as the company reserves its cash balances to serve as financial cushion for the prolonged weakness in O&G industry and is seeking to diversify into the liquefied natural gas (LNG) regasification & storage services market to establish a stream of recurring income.

Prospects

With Petronas’ move to trim RM50.0 bln from its operating and capital expenditure (opex and capex) over the next four years from 2016, the offshore support vessel (OSV) segment will likely remain depressed. We think that Coastal’s outlook remains challenging over the foreseeable future as the deferment of OSV deliveries in its shipbuilding and repair segment will likely prolong under the subdued crude oil prices environment, which will also see reduced demand.

Our orderbook replenishment rate for the OSV segment, meanwhile, remains at RM200.0 mln for FY17 and FY18 respectively, reflecting the poor sentiment across the OSV subsector. For the jack up GCSU segment, our target of RM100.0 mln per year worth of orderbook replenishment is unchanged for FY17 and FY18 respectively.

Meanwhile, Coastal’s plan to deviate from the OSV segment has hit a setback after the Memorandum of Understanding (MoU) inked in August 2016 with PT Jaya Samudra Karunia Gas Internasional and Yudha Kurniawan Tanos in relation to the purchase of a 49.0% stake in PT Jaya Samudra Karunia Gas (JSK Gas) has lapsed on 28th October 2016.

Nevertheless, Coastal’s near-to-short term earnings visibility is still well underpinned by its sizeable outstanding orderbook size of approximately RM2.30 bln (RM800.0 mln for its OSV business segment, while the JU GCSU business segment has an estimated orderbook value of RM1.50 bln).

Valuation And Recommendation

With the reported earnings coming below our forecast, we slashed our earnings estimates by 43.7% and 35.0% to RM49.2 mln and RM72.8 mln for FY17 and FY18 respectively to reflect the poor sentiment in the OSV industry. Correspondingly, we also downgrade Coastal to a SELL with a target price of RM1.10 (from RM1.65).

Our target price is arrived by ascribing an unchanged target PER of 8.0x to our revised FY18 EPS estimate of 13.7 sen per share. At the target price of RM1.10, Coastal will be trading at prospective PERs of 11.8x and 8.0x of FY17 and FY18 respectively, which is close to its four-year historical PER average of 8.0x.

Some of the investment risks include Coastal’s 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: Mplus Research - 29 Nov 2016