News  Yesterday, Coastal Contracts (COASTAL) announced that it had secured contracts for the sale of six units of offshore support vessels for a total value of c.RM318m comprising a sub-sea support maintenance Vessel (SSMV”), a platform supply vessel (PSV) and four units of anchor handling tug supply (AHTS) vessels.

 Deliveries are scheduled up to 2013 and 2014.

Comments These new contracts boosted COASTAL's order book to c.RM1.35b, which elevated its vessel sales to a new record high.

 We are excited as the YTD 2013 total vessel sale of RM1.35b is almost double the amount achieved in 2012 of RM698.0m.

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

Outlook  Net 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 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-2013 to 2015. Given the abundant opportunities, it is likely for COASTAL to secure more contracts.

Forecast  We are maintaining our FY13E and FY14E net profit forecasts at this juncture.

Rating Maintain OUTPERFORM

Valuation  Our unchanged target price of RM3.87 is based on a target CY14 PER of 12x, at a 15% discount to the CY14 PER of 14x ascribed to industry peer 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, the valuation upgrade is for its potential new earnings streams and its strategic evolvement into an offshore asset owner.

 Moreover, the recent pick-up in vessel sales is an indication that the oil and gas shipbuilding industry could be back on an upward trajectory which will provide more opportunities for COASTAL.

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

Source: Kenanga