Period  2Q13/1H13

Actual vs. Expectations  Coastal Contract Bhd (“COASTAL”)’s 2Q13 net profit of RM32.0m brought its 1H13 net profit to RM63.1m. This is within our (RM135.4m) and consensus (RM134.8m) full-year expectations, at approximately 47.0% halftime fulfilment rate.

Dividends  A 3.0 sen NDPS was declared in the quarter within our anticipated 6.2 sen DPS and above the 2.8 sen declared in 2Q12.

Key Results Highlights  QoQ, despite a drop in revenue (-15.3%) due to lower number of vessels being delivered (3 units versus 4 units in 1Q13), net profit was up slightly (+3.0%) largely due to better margins from shipbuilding division, on account of higher-spec vessels being delivered in the quarter.

 YoY, revenue was also down (-11.0%), again due to the lower vessel deliveries (3 units vs. 5 units in 2Q12). However, the higher PBT margins for shipbuilding and a turnaround in the vessel chartering segment led to an overall better bottom-line (+10.8%).

Outlook  Net profit margin was guided to be around 15-25% from FY12 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 assetownership versus the previous build-and-sell business model.

 According to our channel checks, there are >40 jack-up rig contracts in South-east Asia that are expiring from mid-2013 to 2015. Given the abundant opportunities, it is likely that COASTAL would be able to secure morecontracts.

Change to Forecasts  We are maintaining our FY13-FY14E net profit forecasts given that the 1H results are within expectations.

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 to the oil and gas sector is an indication that the shipbuilding industry’s 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