News  Last week, Coastal Contract Bhd (COASTAL) announced that it has secured the sale of seven offshore support vessels (OSVs) worth a cumulative value of c.RM444.0m.

 All these vessels are expected to be delivered within FY14-15.

Comments  We are positive on this contract as it shows that COASTAL able to secure contract wins in a consistent manner.

 This current sale award brings its cumulative FY14 vessel sales to RM802m and brings shipping order book to RM1.4 (total order book is RM2.6b; inclusive of the jack-up compression service unit project worth RM1.2b).

 This contract comes within our assumed RM1.2b shipbuilding order replenishment.

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 RM1.4b.

 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 (JUGCSU) earnings will kick-start in FY15.

Forecast  We maintain our earnings estimates as this contract comes within our FY14 assumed wins.

Rating Maintain Outperform

Valuation  We are currently Neutral on the sector’s prospect as we foresee a short-term slowdown in contract awards. As such we have reduced our PERs by 1x for a majority of stocks within our coverage.

 Having said that; we are maintaining our ascribed PER for COASTAL as we believe the move to asset ownership is a huge re-rating catalyst. Moreover, we believe there could be more contract excitement moving ahead given that

COASTAL has an upcoming jack-up rig to charter out and there are purportedly more JUGCSU opportunities that could emerge in FY15.

 Thus we maintain our TP of RM5.94, based on an unchanged 14x PER on CY15.

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