Period  3Q14/9M14

Actual vs. Expectations Coastal Contract Bhd (COASTAL)’s 3Q14 net profit of RM54.3m brought 9M14 net profit to RM151.7m which is within both our (RM198.2m) and consensus (RM194.0m) full-year forecasts, at 76.5% and 78.2%, respectively.

Dividends  No dividends were declared in the quarter.

Key Results Highlights QoQ, net profit increased by 12.6% to RM54.3m, despite the drop in revenue (-4.1% QoQ). The increase in net profit was mainly due to better product mix (Shipbuilding segment PBT margin firmed up to 23.5% in 3Q14 versus 20.5% in 2Q14).

 YoY, net profit was higher (+37.4% YoY), mainly due to better product mix as mentioned above (Shipbuilding segment PBT margin firmed up to 23.5% in 3Q14 versus 20.3% in 3Q13).

 YTD, net profit surged by 47.8% backed by 38.1% increase in revenue mainly due to: (i) higher vessels sales (14 in 9M14 versus 13 in 9M13) and (ii) again on better product mix as mentioned above (Shipbuilding segment PBT margin strengthened to 22.1% in 9M14 versus 19.8% in 9M13).

Outlook  Order book stands at RM2.5b (RM1.3b for shipbuilding and RM1.2b for the gas compression service unit in Mexico which will kick start in FY15).

 COASTAL is awaiting two high-specification jack-up rigs due in 1ST and 2nd half of 2015. Both these rigs have yet to secure any contracts. However, we understand management is working very hard to close some contract deals soon. 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.

Change to Forecasts

 We maintain our net profit forecasts for now given that the latest results are within expectations.

Rating Maintain OUTPERFORM.

Valuation  We are cognizant of the sector’s de-rating given the current sluggish crude oil prices; as such we are reducing our PER on the stock to 11x (from 14x). Our ascribed PER is 10% above the 10x historical -1 standard deviation level for oil and gas stocks, as we believe the stock should be credited a premium as it is moving into asset ownership business model (versus just depending on vessel sales).

 Post our PER cuts; TP is now RM4.67 (from RM5.94 previously).

 Given the still significant upside, we maintain the stock as an Outperform.

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