News  Yesterday, Coastal Contracts (“COASTAL”) announced that it had secured contracts for the sales of one unit of Subsea Support Maintenance Vessel (“SSMV”) and two units of low-end vessels for a total value of c.RM148m.

 Deliveries are scheduled up to 2013 and 2014.

Comments  These new contracts boosted COASTAL's YTD 2013 total vessel sales of RM1.49b which is 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.

 With the latest contract, the total value of the vessel sales order book stood at c.RM1.34b, which elevated its vessel sales to a new record high.

Outlook  Net margin was guided to be around 15-25% from FY12 onwards due to the normalisation of market conditions for the ship-building industry in the region.

 COASTAL's maiden jack-up rig is due to be delivered in mid-14, which will spearhead its move into an asset-ownership model versus the previous build-and-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 contracts for the jack-up rig.

Forecast  We are maintaining our FY13E and FY14E net profit forecasts at this juncture, pending meeting with management.

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