Period  2Q14/1H14

Actual vs. Expectations Coastal Contract Bhd (COASTAL)’s 2Q14 net profit of RM48.2m, brought 1H14 net profit to RM97.4m which is within both our (RM198.2m) and consensus (RM197.5m) full-year forecasts, at 49.1% and 49.3% respectively.

Dividends  A 3.4 sen NDPS was declared in the quarter, above the 3.0 sen declared in 2Q13. It is below the estimated 4.1 sen implied by the full year 8.2 sen NDPS we have previously forecasted.

Key Results Highlights  QoQ, net profit contracted by 1.9% to RM48.2m, despite the rise in revenue (+7.9% QoQ). The marginal reduction in net profit was mainly due to the product mix that was skewed towards the lower-margin OSVs. (Shipbuilding segment PBT margin down to 20.5% in 2Q14 versus 22.3% in 1Q14).

 YoY, net profit was higher (+50.6% YoY), mainly due to higher vessels sales (six in 2Q14 versus three in 2Q13).

 YTD, net profit surged by 54.2% backed by 49.7% increase in revenue; again, mainly due to higher vessels sales as mentioned above (eleven in 1H14 versus seven in 1H13).

Outlook  The shipbuilding division is currently riding the cyclical uptrend. Although net margins have normalised to 15-25% from FY12 onwards, the shipbuilding industry is still considered lucrative, in our view. Order book (as at 19 June) stands at RM1.2b.

 COASTAL's maiden jack-up rig is due for delivery by end 2H14. There has been no contract awarded as yet, but this asset 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 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 net profit forecasts for now given that the earnings are within expectations. However, we cut our DPS forecasts to 7.6-8.7 sen for FY14-15 (versus adjusted DPS of 8.2-9.3 sen post the bonus issuance) which implies a payout of c.20% per annum.

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 that may catalyse positive revision for the FY15 net profit forecasts. The stock is also trading at CY14-15 PERs of 13.7x and 12.0x, respectively, which are at attractive discounts to other small-mid cap peers like Yinson, which are trading 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