Period

1Q15

Actual vs. Expectations

1Q15 results came in above expectations with net profit of RM65.9m making up of 32.5% and 31.7% of our and consensus full-year estimates.

The positive surprise in net earnings could be due to better-than-expected vessel sales.

Dividends

No dividend was declared in the quarter as expected.

Key Results Highlights

1Q15 net profit surged 34.1% YoY to RM65.9m from RM49.2m due to higher OSV vessels delivered by the group (5 units in 1Q15 vs. 3 units in 1Q14). However, gross margin declined to 18.7% in 1Q15 compared to 23.4% in 1Q14 due to lower margin vessel mix.

On QoQ basis, 1Q15 core net profit jumped 68.6%, also due to stronger OSV vessel sales (5 units in 1Q15 vs. 2 units 4Q14). Gross margin declined 4.4 ppt QoQ due to different in vessel sales mix.

Outlook

We have imputed four months earnings contribution from jack-up gas rig chartered on long-term contract to PEMEX this year.

COASTAL is awaiting its 2nd high-specification jack-up rigs due for delivery in 2H15. If no contract is secured, the management will elect to dispose the rig pre-actual delivery to reduce their risk exposure.

Recall on 14th April 2015, the group has announced the sale of its first Jack up Drilling unit, which is profit making, freeing them from high asset costs upon delivery amid a weak drilling market.

Excluding its 1st Jack Up rig sale earlier and RM1.3b Gas rig contract, the group’s orderbook stands at RM1.1b providing earnings visibility until 2017 amid current challenging market.

Maiden full year contribution from the rig chartered to PEMEX on long-term contract will be felt next year, thereby providing higher earnings stability.

Change to Forecasts

We have increased our FY15 CNP by 16.4% as we have factored in RM40.0m shipbuilding profit from its first Jack Up unit as we were too conservative to regard it as a noncore item in the previous report.

FY16 CNP is reduced by 13.2% as we reduce our new vessel order assumption to RM800.0m from RM1.0b previously in lieu of bleaker oil market outlook.

Rating

Maintain OUTPERFORM.

Valuation

Fair value increased to RM3.47 from RM3.42 previously as we roll over our valuation to CY16 based on 9.0x PER.

This is consistent with small to mid-cap O&G valuation, which ranges from 7x to 10x in a down-cycle.

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 - 22 May 2015