Period  1Q14

Actual vs. Expectations Coastal Contract Bhd (COASTAL)’s 1Q14 net profit of RM49.2m was within both our (RM198.2m) and consensus (RM197.3m) full-year forecasts, accounting for 24.8% and 24.9%, respectively.

Dividends  No dividend was announced.

Key Results Highlights QoQ, net profit was flat, despite the drop in revenue (-11.9% caused by lower number of Offshore Support vessel (OSVs) sold this quarter, at three units versus five units in 4Q13) as the product mix was skewed towards the OSVs with higher PBT margins.

 YoY, net profit was higher (+58.0%) mainly due to: (i) higher vessels sales (5 in 1Q14 versus 4 in 1Q13); and (ii) better margins on product mix.

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 shipbuilding industry 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.

Change to Forecasts  We maintain our forecasts for now given that the earnings are within expectations.

Rating Maintain OUTPERFORM.

Valuation  We maintain our target price to RM5.94 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 13.0x and 11.4x, 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