News     The company announced that it had secured sales for seven new vessels – four Platform Supply Vessels (“PSV”), one Utility Support Vessel (“USV”), one DP2-enabled Remote Operated Vehicle (ROV) Support/Maintenance vessel, and an Anchor Handling Tug Supply (“AHTS”).

These contracts are cumulatively worth RM434m.

The four Platform Supply Vessels (“PSV”) were sold to new customers from Holland and West Africa, the Utility Support Vessel (“USV”) and DP2-enabled Remote Operated Vehicle (ROV) Support/Maintenance Vessel were sold to new customers from Malaysia and Italy; while the Anchor Handling Tug Supply (“AHTS”) were sold to a first-time Norway-based customer, Vega Offshore.

These vessels are scheduled for delivery in 2013 and 2014.

Comments     We are positive on the news as it signals continuing ongoing deliveries for the company.

Timing-wise, we note that the vessel sale trend has improved compared to that of 2012, where the first vessel delivery announcement (worth RM446m) was only performed in July-12.

Coastal’s current order backlog now stands at RM720m.

Outlook    The group’s net profit margin has been guided to be around 15%-25% from FY12 onwards (versus 25%-35% in the previous years) due to the normalisation of market conditions for the shipbuilding industry in the region.

Management is still actively looking out for opportunities to diversify its sources of earnings but its forays into different businesses like engineering & fabrication; and the FPSO and FSO markets, have yet to take off.

Forecast     We maintain our earnings estimates at this juncture.

Rating     Maintain MARKET PERFORM

Valuation     Our target price of RM2.10 is based on an unchanged 7.5x PER.

The discount to peers like Uzma (valued at 9.0x PER) is due to the lack of near term earnings catalysts.

Catalysts for forward earnings estimates and higher valuations will be if: 1) the current year-end order book rises significantly above that of last year; and 2) there is a successful diversification of its business to other markets.

Risks     1) Continued sluggish orders and margin erosion, and

2) the inability to gain new forms of business.

Source: Kenanga