News  Yesterday, Coastal Contracts (COASTAL) announced the completion of its private placement exercise.

 Recall the private placement was proposed: (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  48.3m new shares was issued (as per the minimum scenario) taking the enlarged shares base to 531.4m (from 483.1m previously).

 Gross proceeds raised were RM207.8m, on the back of each new rights being placed at RM4.30/share.

 Under the minimum scenario assumptions, EPS dilution will be a marginal 9.1% for FY14-15. However, we believe new earnings (from jack-up rig and jack-up rig compression unit) will absorb the dilutions going forth.

 As COASTAL 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, the business is still considered lucrative, in our view.

 COASTAL's maiden jack-up rig is due to be delivered in mid-14, which will spearhead the company’s move into an asset-ownership model 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, 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  We dilute our FY14-15 EPS by 9.1% to 32.5 sen and 37.4 sen, respectively, due to the exercise.

Rating Maintain OUTPERFORM

Valuation  Target price is thus reduced to RM5.24 (from RM5.76) based on an unchanged target CY15 PER of 14x.

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

 We highlight that the stock is trading at CY14-15 PER of 14.9 and 13x, which are at attractive discounts to other small-mid cap peers like Uzma and Yinson, which are trading at CY14-15 PERs in the high-teens.

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