• We recently met with Coastal Contract’s management team and discussed about its diversification strategy to mitigate loss of income stream from vessel sales amidst OSV market downcycle.

• The company currently has strong balance sheet with net cash of c.RM250m or RM0.45/share. It plans to utilise this money to become an equity partner to another party which is capable to execute offshore projects such as FPSO and MOPU.

• It also ventured into liftboat operation and Mexico oil & gas market through a JV with Nuvoil to diversify its earnings base.

• We have a non-rated recommendation on Coastal Contract as it is shariah non-compliant according to SC’s current shariah list.

Looking to invest in long-term charter assets

Coastal Contract is pursuing offshore projects such as FPSO, FSO, FSRU and MOPU as it looks to secure its second long-term charter asset. Management shared that there is on-going discussion as it seeks for a suitable partner which is capable to execute such projects. Against the backdrop of limited financial resource in the oil and gas sector, we think it is capable to secure new project leveraging on its strong balance sheet with net cash holding of c.RM250m (as at end FY20). To recap, its jack-up gas compression unit (JUGCSU) named AGOSTO 12 was chartered to Nuvoil Group, an onshore oilfield operator in Mexico, under an 8+4 years charter contract worth RM1.5bn since Jan 2016. This asset contributes to 60-80% of its revenue over FY18-20 (Chart 1).

Diversify into liftboat operation

The company also ventured into liftboat operation business following acquisition of Teras Conquest 7 (TC7) from Ezion through a partnership with JUB Pacific. JUB Pacific who is the operator of 16 units of liftboat and accommodation rigs globally, owns a 20% minority interest in TC7. TC7 currently has orderbook worth RM67m in a 20-month charter contract to an NOC in Middle east. Besides that, it had also formed a JV company with Nuvoil to tender for oil and gas projects in Mexico. To date, it was awarded with a contract to build and operate an onshore gas sweetening plant project for Pemex worth RM258.7m. The management expects to secure another project soon as there will be a need for another facility at the field due to its sheer size.

Not too optimistic with Petronas’ new OSV order

The management is not too optimistic with Petronas’ new OSV orders as it will not remove current OSV market overhang. It noted that the sector is still facing large inventories overhang due to slow recovery in demand for OSV. Currently, the cost of building of new OSV is higher than the market value of idling vessels, hence it opined that it will be more cost effective for Petronas to acquire idling vessels rather than to order for new OSV vessels.

Strong holding power despite less competitive shipyard

Its shipyard currently is less cost-competitive than China’s shipyard in terms of building large size vessel. As such, it can only build small OSV vessels at its shipyard. With limited order for new vessels, it currently uses the shipyard to repair its own vessels. Besides that, it also acts as support base for its unsold vessels, hence avoiding the cost of berthing fee. Similarly, its shipyard can’t handle FPSO conversion project and it will need to contract other shipyards for its future FPSO projects (should it be able to secure new project).

6 unsold vessels currently held in inventory

Coastal Contracts currently has 1 tugboat and 6 OSVs which comprised of 1 anchor handling supply (AHS) vessel, 1 accommodation work barge (AWB), 3 subsea support maintenance (SSM) and 1 platform supply vessel (PSV) (see Table 1). These vessels are classified as part of its property, plant and equipment (PPE) in the balance sheet. The book value of these assets is currently worth c.RM680m following several rounds of impairments, in tandem with declining market value of the assets. These vessels are left unsold due to poor demand amidst oversupply market condition. As such, the company operates these vessels on short term charter and spot market to earn additional income. Currently, only Marcap Supporter is working as it still has 2 years remaining out of its 5-year charter contract with clients.

Financial Highlights

We estimate that Coastal Contracts generates steady revenue of at least RM120m p.a. from its AGOSTO 12 charter. This represents 60-80% of its FY18-20 topline (Chart 1). However, its bottomline were mostly in the red over the period mainly due to depreciation and impairment charges of unsold vessels as well as finance cost. Based on AGOSTO’s daily charter rate of USD80k and assuming its option is exercised, we estimate the NPV of this asset is worth c.RM550m or RM1.00/share (based on WACC of 9%).

Source: BIMB Securities Research - 30 Mar 2021