Period  3Q13/9M13

Actual vs. Expectations Coastal Contract Bhd (COASTAL)’s 3Q13 net profit of RM39.5m brought its 9M13 net profit to RM102.6m. This is within our (RM135.4m) and consensus (RM140.8m) full-year expectations at 76% and 73%, respectively.

Dividends  No dividends were declared in the quarter.

Key Results Highlights QoQ, net profit and revenue were up by 23.3% and 36.1% respectively due to the higher number of vessels being delivered (6 units versus 3 units in 2Q13).

 YoY, net profit was also higher (+29.5%) mainly due to better margins derived from the sale of premium vessels.

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 more contracts.

Change to Forecasts    We are maintaining our FY13 and FY14 net profit forecasts given that the 9M13 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 a 15% discount to the CY14 PER of 14x ascribed to PERISAI (MP; TP: RM1.42).

 While the PER valuation may seem high for COASTAL given that its 5-year average +2 standard deviation level is only 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 to Our Call (i) Lower-than-expected margins and (ii) Inability to secure contracts for maiden jack-up rig.

Source: Kenanga