News

COASTAL announced that its wholly-owned subsidiary has secured a contract for the sale of one unit Jack-up Drilling Rig (JUDR) for c.RM807.0m.

Including the new contract and after adjusting for revenue recognition from vessels delivered to buyers up to 22 April 2015, COASTAL has c.RM1.9b worth of cumulative shipbuilding sales order book awaiting delivery to customers up to 2017.

Comments

This is not a surprise to us as we were already expecting sale of its incoming Jack-up unit as the management seeks to avoid asset ownership risk in view of the current weak drilling market environment.

Earlier, the group intended to take delivery of the rig to gain exposure in the drilling rig market through potential charter contract which will provide recurring income. However, the group decided to dispose the asset to avoid carrying substantial asset risk after the plunge in oil prices.

While the vessel cost are undisclosed, we reckon the selling profit could be decent given the recent weak market condition.

We have not factored in the gain on sale of the rig into our earnings forecasts as we deemed it as a non-core item in contrast to their bread & butter OSV shipbuilding business.

If we factored in this gain, the FY15E net profit would be RM230m-RM240m from RM202.8m assuming 4-5% net margin on the sale.

Outlook

We only expect four months earnings contribution from jackup gas rig chartered on long-term contract to PEMEX this year, providing partial buffer to the more volatile shipbuilding earnings.

COASTAL is awaiting another high-specification jack-up rig, due in 4Q15. Charter contract has yet to be secured for this particular asset.

However, we understand management is working very hard to close some deals soon. If no contract is secured, we believe the management will elect to dispose the rig preactual delivery to reduce their risk exposure.

Forecast

We maintain our forecast.

Rating

Maintain OUTPERFORM

Valuation

Fair value maintained at RM3.42 based on unchanged 9.0x CY15 PER.

This is consistent with valuation of small-mid-cap O&G players who range from 7x to 10x in a down-cycle. We valued COASTAL at the upper range due to: (i) its significant orderbook which provides strong earnings visibility, and (ii) conservative business model of lowering asset risks during unfavorable times.

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 Research - 23 Apr 2015