News  Last week, Coastal announced that it has secured more contracts, for three units of Offshore Support Vessels (OSVs) and two units of low-end vessels.

 These contracts are cumulatively worth RM178m.

 Two units of the OSVs were for repeat customers while another OSV and two units of the low-end vessels were sold to new customers.

 These vessels are scheduled for delivery in 2014 & 2015.

Comments  We are positive on the contract wins as it signals continuing ongoing deliveries for the company; more so given that it has emerged so early in the year (in CY13 the first large sales was announced in Apr-14).

 This is the first vessels sales contract secured in FY14.

 Post these contracts and excluding deliveries to March-14, Coastal’s current order backlog now stands at approximately RM1.2b.

Outlook  The shipbuilding division is currently riding on a cyclical uptrend with order book standing at c.RM1.2b. Although net margins have normalised to 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 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  We are raising our FY14-15 revenue forecasts by 14% and 17%, respectively, as we believe COASTAL will endeavour to deliver around 80% of its orderbook (outstanding of c.RM1.3b at end-CY13) in CY14 (versus our previous 70% assumption). We also expect RM1.2b new wins and another 80% delivery rate for CY14.

 The changes result in a 14.7% and 13.5% increase in our FY14-15 net profit forecasts.

Rating Maintain OUTPERFORM

Valuation  Our new estimates increase our target price to RM5.94 (from RM5.24 previously) based on an unchanged 14x PER, which is above the stock’s historical average valuations. However, we believe this is justifiable as it is moving into asset ownership business model (versus just depending on vessel sales).

 We highlight that our net profit forecasts exclude potential jack-up rig earnings. The stock is also trading at CY14-15 PERs of 14.9 and 13x, respectively, which are at attractive discounts to other small-mid cap peers like Uzma and Yinson, which are trading at CY14-15 PERs in the highteens.

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