News  Yesterday, Coastal Contracts (COASTAL) announced that it had secured a charter contract for a Jack-up Gas Compression Service Unit for a total value of c.RM1.24b from Petroleos Mexicanos (PEMEX).

 The construction work will start immediately and expected to be completed in 1H15.

 The firm duration for the contract is eight years with an extension option for another four years thereafter by 2H15.

Comments  We are significantly surprised and positive on the win, as we had not seen this coming. It also

represents another chapter for COASTAL in its bid to move into asset ownership, versus just being a shipbuilding and trading company.

 A back-of-the envelope calculation suggests revenue of RM103.3m per annum, and assuming a conservative 15-20% net profit margin, this contract could rake in c.RM15-20m per annum for COASTAL.

We look forward to seek more details from the management soon.

Outlook  Net margin for the shipbuilding division is guided to be around 15-25% from FY12 onwards due to the normalisation of market conditions.

 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 Southeast Asia that are expiring from mid-2013 to 2015, which implies abundant opportunities on the horizon.

Forecast  We will not be including the current jack-up rig compression’s earnings in our FY14 net profit forecasts as the contract only kick-starts in 2H15. However, we are looking to revise our assumptions with an upward bias given the potential of: (i) higher shipbuilding revenue and (ii) inclusion of jack-up rig earnings by mid-14.

 We look to introduce our FY15 net earnings forecasts during the 4QFY13 results report later this month (expected to be on the 25th Feb).

Rating Maintain OUTPERFORM

Valuation  We maintain our target price of RM4.51 based on an unchanged target CY14 PER of 14x. Whilst this PER is above the stock’s historical average +2 standard deviation PER trading of 11.9x, we believe this is justifiable as it is moving into asset ownership (versus just vessel sales).

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

Source: Kenanga