kcchongnz blog
Stock Pick: Coastal Contracts Bhd kcchongnz
Coastal Contracts Berhad
Disclaimer: Please be reminded that this article serves as sharing and learning purpose and it doesn't constitute a buy or a sell recommendation.
Introduction
It was reported that as at September 2014, Coastal Contracts has an order book of RM2.5 bn. Of this, RM1.3bn is for shipbuilding and vessel sales orders which will be delivered to customers up to 2015. The balance MYR1.2bn order book is for the 8+4-year charter of a gas compressor service unit (GCSU) to Mexico-based Petroleos Mexicanos (Pemex), which commences in 2H15.
Finally Coastal Contracts will be elevated to the billion Ringgit club soon. It could even happen sooner than expected, may be by the end of this financial year ended 2014.
I somehow am sceptical about a company announcing huge order and procurement of big contract works. Experience has shown that many of these companies with big orders failed to deliver, and instead of making big profit, ended up huge losses. One classic example is my favourite company, KNM, as described in the link below:
http://klse.i3investor.com/blogs/kcchongnz/62293.jsp
Hence before jumping onto the bandwagon, I like to look at its past performance and management capability to gauge if big contracts would possibly end up in huge profit or the other way round.
“History doesn't repeat itself, but it does rhyme.” Mark Twain
The Business of Coastal Contracts
Coastal Contracts Bhd is a Sandakan-based company engaged in investment holding and provision of management services. The Company, through its subsidiaries, operates in two segments: vessels manufacturing and repairing services (90%), which include fabrication and sale of marine transportation vessels and provision of ship repairs and maintenance services, and vessels chartering and equipment hire (10%), which include the provision of vessels transportation and equipment hiring services. Operations are carried out in Malaysia, Indonesia and Singapore. Coastal Contracts is controlled by Ng’s family with Mr Ng Chin Heng as the principal founder with 58% share holdings.
Share Price Movement
The share price chart of Coastal Contracts below shows its share price movement for the last 5 years. Its share price has run up from about RM1.55 five years ago to an adjusted price of RM5.34 half a year ago and then retreating to a low of RM2.42 two months ago due to the plunge in oil price recently before recovering to a close of RM3.27 on 6th February 2015.
Financial Performance
Figure 1 below shows the 8-year growth of revenue from December 31st 2005 to 2013. Revenue grew at a very high compounded annual growth rate (CAGR) of 46% from RM103m in 2005 to RM675m in 2011 for a five year period. It continued to grow after that albeit at a slower rate. The CAGR was very high at 28% from RM103 in 2005 to RM763m in 2013 for a long period of 8 years. Coastal is certainly a high growth company.
How about its growth in profit? Is it in tandem with the growth in revenue?
Figure 2 below shows the growth in net profit is equally if not more impressive at CAGR of 65% from RM16.2m in 2005 to RM200m in 2010, and then retreated to RM119 in 2012 before improving to RM151m in 2013. The CAGR for the whole 8-year period stood at an expressive 32%.
Am I happy with the high growth in revenue and earnings of Coastal Contract? Not really yet.
I have seen many fast companies growing at high revenue and even in profit but ended up as huge shareholders destroyers with their share prices fallen badly. Some of them are mentioned here:
http://klse.i3investor.com/blogs/kcchongnz/63777.jsp
They put out their hands for money from shareholders, borrow freely from banks and investors, and used the money for big acquisition trails with the name of “growth”, and earned pittance from those capitals. For example a company can still grow its earnings say at 2% from borrowed money, but had to pay 5% interest rate. They incurred heavy losses when the economy turned bad, for example during the US sublime crisis, and eventually wrote off their losses. Hence growth in revenue and earnings are never my priority in investing, unless they are accompanied by three important considerations as listed below.
- Is its profit margin higher than its industry?
- Does it make higher return than its cost of capitals?
- Does its cash flow in tandem with the earnings?
Profit margin
Figure 3 below shows the profit margins of Coastal have been consistently high. Net profit margin rose to 35% in 2009 before retreating to 16% in 2012, still acceptable, and recovered to 20% in 2013. Average net profit margin is about 24%. This is much higher than its industry average of about 4%.
Return on Equity
Figure 4 below shows that the Return on Capital for Coastal has been very good. It rose from 14% in 2005 to 47% in 2010, uninterrupted even by the US sublime crisis in 2008. ROE has declined somewhat to 16.5% last year as margin was squeezed and higher amount of cash built up. However this is still way above its cost of equity and that of the industry of about 10%. A better representation of its return on capital may be its return on invested capital, ROIC, which is much better as shown in Figure 4.
Hence it appears the quality of its growth is good if not considered excellent.
Cash flow
One common problem with high growth company is the cash flow. Many of them have poor cash flow from operations due to the need for increasing working capital and capital expenses. I have deliberated this problem with some of the high growth companies here:
http://klse.i3investor.com/blogs/kcchongnz/45373.jsp
It is alright if cash flow eventually emerging to the normal level with cash flow in tandem with earnings and have free cash flow eventually as companies went into a more matured phase, but often it was not the case. Is Coastal in that category? Table 1 below shows the cash flow of Coastal since 2008.
Table 1: Cash flow of Coastal
|
Year |
2013 |
2012 |
2011 |
2010 |
2009 |
2008 |
6-yr Average |
|
CFFO |
117366 |
89480 |
59314 |
131819 |
30883 |
73955 |
83803 |
|
Capital expenses |
-12266 |
-935 |
-2422 |
-11359 |
-6918 |
-36538 |
-11740 |
|
FCF |
105100 |
88545 |
56892 |
120460 |
23965 |
37417 |
72063 |
|
FCF/Revenue |
14% |
12% |
8% |
18% |
5% |
11% |
11.2% |
|
FCF/IC |
15% |
14% |
9% |
24% |
5% |
12% |
13.2% |
Table 1 above shows that there were abundant cash flow and free cash flow for Coastal in the last few years. Free cash flow, after deducting cost for capital expenses, averages more than 10% of revenue and invested capital respectively. This shows the excellent quality of its earnings and shareholder value enhancement capability of the management.
Risks
Coastal Contract’s balance sheet is healthy. It has a net cash of RM303m. Its Current assets is 2.7 times its current liabilities. Its interest payment is negligible compared with its operating profit and cash flow from operations. Quick ratio at 0.9 is slightly below unity as a large amount of RM 961 million is tied up in inventories. This may be the nature of the business of ship building industry. The management has mentioned before that it has mitigated this risk by insisting on deposits to be paid by the customers upon placing the orders and subsequent progress billings.
As oil price has plunged a few months ago, further weakness in oil price may affect its profitability especially the charter of a gas compressor service unit (GCSU) to Mexico-based Petroleos Mexicanos (Pemex), which commences in 2H15. However, oil price appears to be stabilising recently.
The above analysis shows that Coastal is indeed is a good company from every angle. A good company may not be a good investment as it depends on what is the price.
Market Valuation
The share price of Coastal is RM 3.27 at the close on 6ht February 2015. With the earning per share of RM 0.313 for the financial year ended 31/12/2013, the price-earning-ratio is at 10.5. Its enterprise value is just 8.6 times its earnings before interest and tax. Price-to-sales is 2.1, price-to-cash flow is 13.5 and price-to-free cash flow is 15. These valuation metrics are reasonable considering its great financial performance.
A discount cash flow analysis with a growth assumption of 8% for the next 5 years and a terminal growth of 3%, and a required return of 10% will result in an intrinsic value of Coastal of about RM4.24. This represents a margin of safety of 23% investing in it at the present price of RM3.27.
Recent financial performance
Coastal announced its 2014 third quarter results ending 30 September 2014 with a cumulative revenue of RM 700 million and profit of RM 152 million compared with RM 507 million and RM 103 million respectively of the previous corresponding nine month period, representing an increase of 38% of revenue and 48% of profit respectively. Net profit margin improved to 22% from 20% previous year.
Coastal’s Order book stands at MYR2.5bn as at September 2014. Of this, RM1.3bn is for shipbuilding and vessel sales orders which will be delivered to customers up to 2015. The balance MYR1.2bn order book is for the charter of the gas compressor service unit will commence in 2H15.
Conclusions
Coastal is proven to be a good, well managed and growing company with quality earnings and high return on equity, together with good cash flows. Its market valuations are reasonable too. Besides, not taken into consideration of the analysis above, its financial performance in the last three quarters has improved tremendously. Its visibility of earnings appears to be clear too. Coastal at its present price of RM 3.27 per share may be a good investment.
K C Chong (9th February 2015)
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Discussions
3 people like this. Showing 36 of 36 comments
Hi KC,
I believe we have reached quite the same conclusion towards Coastal. In my opinion, Coastal next growth driver is likely to be JU rig delivery rather than selling more and more OSVs....
Yup, hope we can exchange more ideas from each other. Below my personal mail box:
chinyongcheong85@gmail.com
2015-02-10 22:40
Hi KC, for sure ^^
Hi YiStock,
I noticed that you have a blog in i3 but I couldn't see any content inside?
2015-02-10 22:57
Hope to learn more from both of u..there are simply too many valuation mmethods for one to master all.
Cheong, i do not know n too lazy to learn how to write good blog actually..all my spread sheets are with figures only.
2015-02-11 11:27
kcchong, what you have shown in the article is coastal's historical performance (which you used as justification for investment). They made RM200 mil net profit. That was during the boom time. With oil now at current depressed level (and expected to stay low due to the new player, shale oil), can coastal repeat the same performance ? Most of its orders are offshore support vessels. Will there still be so much demand going forward ? Will profit margin be depressed to compete with other players for order book ?
Peter Lynch said don't drive by looking at the rearview mirror.
Afre you driving your New Zealand SUV by looking at the rearview mirror ?
2015-02-24 09:01
fortunecheat,
I would say you have some relevant questions. Good work.
But sorry I can't answer your questions. Firstly I am not a fortune teller, I can't see the future. And secondly I don't cheat. I won't simply paint a rosy future picture to cheat you. Can't do it.
However, I don't think you can tell what is in store for the future too. In fact none can tell the future correctly and consistently, not the economists, analysts, the talking heads in the media etc. Let me cite the same example you did in your following post.
Just a few months ago when everyone is so optimistic about oil and gas companies, including Coastal which went up to more than RM5.30 a share half a year ago, did anyone foretold the future then that crude oil could crash in such a furious manner? Did you? And how are you so sure that it won't recover in the future?
You don't seem to have read enough about investing and forecasting about the future. If you do, you will find that there is no statistical significance that anyone can predict correctly the future of stocks, financial markets, commodity prices etc. Note the word "statistically significance"
Nobody drives by looking at the rear view mirror. Not me, do you? But I do use the rear view mirror; when reversing, before overtaking, parking, etc.
May be you should do that too. Otherwise it is dangerous to drive.
In investing, yes, I look at the rear view mirror often too as i tend to have the opinion that a company, a good business, which has been manged well by the same good people in the past, will most probably do well in the future. Note the phrase "most probably".
That is what Warren Buffet said too
“In the business world, the rearview mirror is always clearer than the windshield.”
I hope you understand what he said.
So for me when I drive, I have to look ahead the windshield, but I can only see that much. I also have to look at the rear mirror once a while as explained.
Posted by fortunecheat > Feb 24, 2015 09:01 AM | Report Abuse
kcchong, what you have shown in the article is coastal's historical performance (which you used as justification for investment). They made RM200 mil net profit. That was during the boom time. With oil now at current depressed level (and expected to stay low due to the new player, shale oil), can coastal repeat the same performance ? Most of its orders are offshore support vessels. Will there still be so much demand going forward ? Will profit margin be depressed to compete with other players for order book ?
Peter Lynch said don't drive by looking at the rearview mirror.
Afre you driving your New Zealand SUV by looking at the rearview mirror ?
2015-02-24 10:38
Good morning kcchong (or afternoon, if you are in New Zealand).
First of all, let me clarify that my name is not to imply that you cheat (a bit cocky you are, but I consider u quite a gentleman with proper character. So no issue with that). My name is actually meant to honour a forum member who created portfolio in January but used December price as entry cost.
Back to the topic. I am not actually challenging you on Coastal. Just seeking clarification. I don't think I have been hostile in my query. The only difference from others is that I left out the flattery and pleasantries, and prefer straight talk. Hope that doesn't give you a wrong impression.
Happy with your explanation. Especially the part on "there is no statistical significance that anyone can predict correctly the future....". That was exactly the same conclusion I have after what happened recently to the oil market. It threw every assumptions, valuation, modelling out of the window. I did learn a new lesson from that. Nowadays, I gave more emphasis to diversification as a result.
Last but not least, I hope you are not driving and reading my response through your smart hone at the same time. That is not safe no matter you are looking at the windshield or rearview window
Have a nice afternoon. It is pretty hot over here.
2015-02-24 11:36
Posted by fortunecheat > Feb 24, 2015 11:36 AM | Report Abuse
Good morning kcchong (or afternoon, if you are in New Zealand).
Back to the topic. I am not actually challenging you on Coastal. Just seeking clarification. I don't think I have been hostile in my query. The only difference from others is that I left out the flattery and pleasantries, and prefer straight talk. Hope that doesn't give you a wrong impression.
Happy with your explanation. Especially the part on "there is no statistical significance that anyone can predict correctly the future....". That was exactly the same conclusion I have after what happened recently to the oil market. It threw every assumptions, valuation, modelling out of the window. I did learn a new lesson from that. Nowadays, I gave more emphasis to diversification as a result.
Last but not least, I hope you are not driving and reading my response through your smart hone at the same time. That is not safe no matter you are looking at the windshield or rearview window
Glad you are happy with my response to your earlier post. No, I don't need any flattery and pleasantries from you and I don't really know who you actually are. And please read my response to you again, I do tell you to use both the front screen as well as the rear view mirror when driving. I didn't ask you to use your smart phone when driving, did I?
And just a reminder. Fundamental value investing is a evergreen thingy; buying good companies such as that of Pintaras, Scientex when they are cheap. and avoid lemon like London Biscuits, KNM, GCB etc. These are excellent near perfect examples to use to remind investors and it happen that I know them more than other companies.
Fundamental value investing won't change with time too. If you feel "sian" reading my fundamental investing principles and examples used, I can't help you.
Well you can use your examples and not follow mine. i like to see your examples, or your investment strategies. I am sure others like to see too.
Posted by fortunecheat > Feb 23, 2015 05:32 PM | Report Abuse
can write something new ? it is Lonbisc, Pintaras.... AGAIN...
a bit sian already...
2015-02-24 16:09
Recommend to buy at RM 3.27 saying intrinsic value RM 4.24. Now RM 1.84 losing RM 1.43.
2015-08-16 11:21
Good stock but timing to buy is also important o/w lose a lot of money.
2015-08-16 11:42
Posted by donfollowblindly > Aug 16, 2015 11:21 AM | Report Abuse
Recommend to buy at RM 3.27 saying intrinsic value RM 4.24. Now RM 1.84 losing RM 1.43.
donfolloblindly,
As usual, you follow me blindly on those few stocks (out of scores of stocks) I have written for sharing of knowledge which have gone down in prices, and come out to attack when the opportunity comes, like this bear market time.
Everyone of your attack is like the above, that I recommend to buy at such and such a price and the price now has dropped by such and such. Have you ever intelligently debated with me on the salient fundamental points I was sharing in any of the 150 articles I have written in i3investor?
Most of my sharing starts with this phrase:
“Disclaimer: Please be reminded that this article serves as sharing and learning purpose and it doesn't constitute a buy or a sell recommendation.”
Where the f I have said I “recommended” you stupid dontfollowblindly to buy which and which stock? did you pay me to do so or not?
2015-08-16 12:49
Aiyoh, if bought in Feb kena jialat gao gao tiaw woh, half capital kena tibai gone woh
2015-08-16 12:53
Posted by donfollowblindly > Aug 16, 2015 11:21 AM | Report Abuse
Recommend to buy at RM 3.27 saying intrinsic value RM 4.24. Now RM 1.84 losing RM 1.43.
Posted by thomasview > Aug 16, 2015 11:27 AM | Report Abuse
Aiyoh, good stock but wrong timing to buy in february. Really jialat
Posted by donfollowblindly > Aug 16, 2015 11:42 AM | Report Abuse
Good stock but timing to buy is also important o/w lose a lot of money.
Posted by thomasview > Aug 16, 2015 12:53 PM | Report Abuse
Aiyoh, if bought in Feb kena jialat gao gao tiaw woh, half capital kena tibai gone woh
thomasview (whoever you really are), why? Lost money follow blindly your friend dontfollowblindly when that dontfollowblindly read my article on Coastal Contracts? "kau be kau bu" liao? Cry baby cry, just because you follow blindly and lost money?
How come such a coincidence you came out the same time as dontfollowblindly making complaints here? Your friend ah?
Go blame your friend (?) dontfollowblindly recommending you buy!
2015-08-16 13:17
Never blame anybody if stock price comes down
KC wrote the article with all its facts and opinions fully laid out in front of the readers. He didn't put in any fake info to mislead anybody. If after reading the article and u go ahead to buy, u assume full responsibility.
2015-08-16 13:24
Anyone who bought share in early 2015 and keep til now will lose due to KLSE market collapse. Don't blame others for your own failure. KC said that the stock market is unpredictable. Low price can go lower, or even much lower when market collapse.
2015-08-16 13:25
Mr kcchongnz write the article is during the good time and very unfortunate that the share market crash not only in Malaysia but in many countries. Anyone who bought share in early 2015 and keep til now will lose due to KLSE market collapse. Don't blame others for your own failure. KC said that the stock market is unpredictable. Low price can go lower, or even much lower when market collapse.
2015-08-16 13:28
I dislike people that wrote articles to spread rumours to con people to buy and subsequently dump on the buyers. I think that is unethical and deserves to be condemned. KC is totally not in that category. He shouldn't bear a single bit of responsibility for anybody losses. In the first place, he doesn't get to share a single sen if the readers make money
2015-08-16 13:33
A person use new id is here again. KC Chong and I will be in trouble.
Thank you.
2015-08-16 13:45
Posted by duitKWSPkita > Aug 16, 2015 01:39 PM | Report Abuse
Icon8888...
U cannot like that... I know u had dinner with abang KC Chong last nite in Auckland and watching Dato Lee match together...then today u praise him openly.... Hahahah.. Kidding la..
Actually I like Kc Chong's style in analysis. I am on full FA and value investment now.... Wait until I earn enough then I wanna register for Kc's course.... Malaysia ok la.. Auckland or kangaroo land I nt afford lo
Where got dinner with Icon8888. I can't recall that. Where got watch Dato' Lee? I was watching rugby between All Black and Kangaroo at a pub at Sky City when All Black won handsomely. Shouted until I have lost my voice.
duit, you have your own style of value investing, a proven one too. You don't need to learn from me. Maybe I should learn from you.
2015-08-16 13:54
Posted by thomasview > Aug 16, 2015 01:49 PM | Report Abuse
KC, why you tibai and bantai me? No mention you woh, no wind no tremor kena pachukang from you leh. Sikit ku dicini woh
Sorry if I bantai you wrongly. Sorry sorry. Like in investment, I sometimes, not only sometimes, but sometimes can be often, can be wrong too. No malice intended.
2015-08-16 13:58
Posted by duitKWSPkita > Aug 16, 2015 02:02 PM | Report Abuse
KC senior.... Jz met and clear some doubts with the management n together with conservative FA analysis.. After this when recovery take place VS industry will hit RM7 without stokist help... Partly due to Vietnam's income... I will not propose buy call now obviously... Thanks for discussion always.. Sincerely appreciate it
In investing, it is the future which is important. if you have the information about the future which others don't have, you can make a lot of money, no doubt about it. I don't have the information of the future of a company, and hence I have to rely on what has been published. What I share in i3investor is no doubt, history. I don't know its future, and my character is I don't simply listen to what others, including the management, tell me about the future of the company.
Do pay a little attention of the few concerns I have expressed, namely the cash flow, inventories, and the problems faced by its major client. I could be wrong as I have no information of its future.
By the way, what I have shared is for discussions purpose, which is true about the past of VS, could be for other companies, not necessary will be true for the future of VS.
2015-08-16 14:20
VS again? Simple thing-Keurig in trouble, so will VS! avoid at all cost lah. simple as tht
2015-08-17 13:42
Kcchongnz, it is time to revisit coastal which has been neglected by investing community.
Investing is a popularity contest, and the most dangerous thing is to buy something at the peak of its popularity. The safest and most potentially profitable thing is to buy something when no one likes it, says Howard Mark.
2016-02-20 14:40
Posted by buddyinvest > Feb 20, 2016 02:40 PM | Report Abuse
Kcchongnz, it is time to revisit coastal which has been neglected by investing community.
Investing is a popularity contest, and the most dangerous thing is to buy something at the peak of its popularity. The safest and most potentially profitable thing is to buy something when no one likes it, says Howard Mark.
Buddy, I agree with your principle. But i really don't know when oil price will recover. Invest you do but don't swing the fence.
2016-02-20 16:14
instead of being promoted to the billion ringgit club, it could soon get relegated to the penny stock circus, lol.
2016-06-22 11:20
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I had just done my own research on this company too. Link as below:
https://drive.google.com/file/d/0By4ITWART_ZUMjFldGw4aElfUHM/view?pli=1
2015-02-10 21:12