Unexciting Prospects

• With the significant excess capacity in the offshore supply vessel (OSV) sector owing to the low crude oil prices environment, we think that Coastal Contracts’ prospects remain unexciting over the foreseeable future. As it is, the group only managed to deliver one OSV in 2016, whilst numerous clients have asked for deferments on its outstanding orders at approximately RM800.0 mln.

• Meanwhile, its plan to diversify from the OSV segment has suffered a setback after the Memorandum of Understanding (MoU) inked in August 2016 in relation to the purchase of a 49.0% stake in PT Jaya Samudra Karunia Gas (JSK Gas) has lapsed in 4Q2016. Nevertheless, Coastal’s near-to-short term earnings visibility will be 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). In view of the absence of new catalysts and the difficult operating environment expected to prolong, we are ceasing our coverage on Coastal Contracts.

• We expect Coastal’s earnings to deteriorate by 70.6% Y.o.Y to RM49.2 mln in FY17 before bottoming out and recover 48.1% Y.o.Y to RM72.8 mln in FY18, on the expectations of a rebalancing in crude oil demand and supply which may translate higher crude oil prices. However, we still see fewer new orders due to uncertain price outlook.

• Our last assigned target price was RM1.10, which was arrived by ascribing an unchanged target PER of 8.0x to our unchanged FY18 EPS estimate of 13.7 sen per share. At the target price of RM1.10, Coastal trades 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

Source: Mplus Research - 21 Feb 2017