News    Last week, Coastal Contracts (“COASTAL”) announced that it had secured contracts for seven offshore support vessels with a total value of RM425m. 

Five units were for anchor-handling-tug-supply (AHTS) vessels; one was a 300-pax Accommodation Work Barge, and the last unit was a 85m Subsea Support/Maintenance vessel. Deliveries are scheduled for 2013-2014.

Comments    The new contracts boost COASTAL's order book to above RM1b from RM720m previously.

We are excited as the YTD 2013 vessel sales of RM859m have surpassed the total 2012 vessel sales of RM698m and believe this signifies the improving outlook for the shipbuilding industry. 

Looking back, the previous peak was in 2008 where COASTAL locked in RM919.2m of vessel sales.

Outlook   Net profit margin was guided to be around 15-25% from FY12E onwards due to the normalisation of market conditions for the shipbuilding industry in the region.

COASTAL's maiden jack-up rig is due to be delivered in mid-14, which spearhead its move into asset-ownership versus the previous buildand-sell model. According to our channel checks, there are >40 jack-up rig contracts in South-east Asia that are expiring from mid-CY13 to CY15. Given the abundant opportunities, it is likely that COASTAL should be able to secure more contracts.

Forecast   We are maintaining our FY13-14E net profit forecasts for now pending COASTAL's 2Q13 result in end-Aug.

Rating   Maintain OUTPERFORM

Valuation    Our unchanged target price of RM3.87 is based on a target CY14 PER of 12x based on 15% discount to the CY14 PER of 14x ascribed to "PERISAI"; OP; TP: RM1.76). 

While this may seem high for COASTAL given that its 5-year average +2 standard deviation level is only at 10.1x, we believe the valuation upgrade is justified as it is on the verge of adding new earnings streams and evolving to an offshore asset owner.

Risks   i) Lower-than-expected margins; and 2) Inability to secure contracts for maiden jack-up rig.

Source: Kenanga