News    Yesterday, Coastal Contracts (“COASTAL”) announced that it had secured contracts for the sale of two offshore support vessels for a value of approximately RM170m comprising an anchorhandling tug supply (“AHTS”) vessel and a subsea support/maintenance vessel.

Deliveries are scheduled up to 2014, but we reckon the AHTS could be delivered within the year.

Comments    These new contracts boosted COASTAL's order book to approximately RM1.2b (from c.RM1b previously).

We continue to be excited by the string of announcements from COASTAL, which elevated its vessel sales to a new high.

The YTD 2013 vessel sales currently stand at RM1b, which surpasses the RM698m achieved in 2012 and the 2008 peak of RM919.2m.

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 will 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 would be able to secure more contracts.

Forecast   We are maintaining our FY13-14E net profit forecasts for now pending COASTAL's 2Q13 result, which will be in the final week of Aug-13.

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 the PER valuation 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 into an offshore asset owner.

Moreover, the pick-up in vessel sales is an indication that the oil and gas shipbuilding industry fortune could be back on an upward trajectory.

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

Source: Kenanga