Coastal Contracts; Buy; RM2.98
Price Target: RM3.35; COCO MK

Coastal Contracts announced yesterday that it secured RM318m in vessel sales order comprising: one subsea support maintenance vessel, one platform supply vessel, and four anchor handling tug supply vessels. This effectively brings its YTD contracts secured to RM1.35bn, with RM1.28bn in outstanding sales orders as at 21 Oct 2013. The vessels are to be sold to a mix of both returning as well as new clients, deliverable in 2013 and 2014.

This is a strong win for Coastal Contracts, as it brings its sales secured to 2008 levels of more than RM1bn, though at lower vessel prices compared to the oil and gas boom at that time (operating margins of 15- 20% are expected for 2013-2015 vs. c.30% in 2010-2011). This is also more than our order win assumption of RM850m, implying upside to our current earnings forecasts. Further orders would be fueled by the vessel replacement cycle and continued investments by global O&G players like Petrobras. In addition, Coastal’s delivery of a jack-up rig would further boost operating margins considering still strong demand and rising rig day rates. The stock is a strong proxy for crude oil price, which has retained its resilience at US$99/bbl. Maintain BUY with RM3.35 price target and earnings under review, pending further clarity on vessel delivery timings. 

Source: HwangDBS Research - 22 Oct 2013