News  Yesterday, Coastal announced that it has secured contract sales for 6 vessels (3 Offshore Support Vessels (OSVs) and 3 tugboats).

 These contracts are cumulatively worth RM180m with deliveries scheduled in 2014 & 2015.

Comments  We are positive on the wins as it showcases COASTAL’s ability in securing vessels sales.

 YTD vessel sales for COASTAL is RM358m bringing the shipbuilding order book to RM1.2b (significantly higher compared to RM676.0m as at 30 June 2013).

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. Management expects the demand for higher specification OSVs to increase in the medium-term supported by the pick-up in offshore activities.

 COASTAL's maiden jack-up rig is due to be delivered by end-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 Southeast 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 maintaining our FY14E and FY15E net profit forecasts at this juncture as we already factored in c.RM1.2b of new wins for the company.

Rating Maintain OUTPERFORM

Valuation  We maintain our target price at 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 12.7x and 11.2x, respectively, which are at attractive discounts to other small-mid cap peers like 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