News  Yesterday, Coastal Contracts (COASTAL) announced it is proposing a private placement of up to 10% of its issued and paid-up capital.

 The exercise is expected to be completed before 3Q14.

 The rationale for the private placement is: (i) to raise funds and avoid interest expense for future expansion by not having to revert to loans, (ii) strengthening the financial position and (iii) enhancing the liquidity and marketability of the shares.

Comments  The maximum scenario will raise 54.4m shares and expand share base by 23.8% to 598.0m shares (from current base of 483.3m shares).

 Based on an indicative price of RM3.81 per share, the maximum scenario will raise RM207.1m in gross proceeds of which a major portion will be utilised for working capital.

 Under the maximum scenario assumption, EPS dilution will be c.19.2% for FY14-15, but we believe new earnings (from jack-up rig and jack-up rig compression unit) will absorb the dilutions.

 As it is currently in a net cash position, the exercise will further strengthen its balance sheet.

Outlook  The shipbuilding division is currently riding on a cyclical uptrend with order book standing at c.RM1.2-1.3b. Although net margins have normalised at 15-25% from FY12 onwards, they are still lucrative, in our books.

 COASTAL's maiden jack-up rig is due to be delivered in mid-14, which will spearhead its move into an assetownership 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, which implies abundant opportunities on the horizon. Moreover, there could be cross-selling opportunities with its entry into Mexico.

 COASTAL’s long-term jack-up rig compression unit earnings will kick-start in FY15.

Forecast  No change to FY13-14 EPS until the private placement is completed.

Rating Maintain OUTPERFORM

Valuation  We maintain our target price of RM5.76 based on an unchanged target CY15 PER of 14x.

 Assuming a maximum scenario for the private placement, our target price will be revised to RM4.65/share; which still provides a hefty upside from the current share price.

 Whilst this PER valuation is above the stock’s historical average +2 standard deviation PER of 11.9x, we believe this is justifiable as it is moving into asset ownership (versus just depending on vessel sales).

Risks to Our Call (i) Lower-than-expected margins and vessel sales; (ii) Inability to secure contracts for maiden jack-up rig; and (iii) delay or cancellation of jack-up rig gas compression unit.

Source: Kenanga