News

In The Edge Daily, COASTAL is reported to be in preliminary talks with several parties to pursue inorganic growth through mergers and acquisitions.

It is believed to be looking at vertical integration, horizontal integration or even diversification. Timelines of the discussions, however, are not disclosed at the moment.

Comments

It is not entirely a surprise to us due to the favorable market timing for acquisitions under the current market scenario as valuations of the sector is significantly cheaper compared to a year ago.

However, we would still prefer the acquisition to be either horizontal or vertical as the O&G sector is its forte. Diversification into another sector would give rise to higher uncertainty to its business direction, in our opinion, and it could be costly for the group from management’s perspective.

Funding would not be an issue for the group given its RM493.3m war chest in its balance sheet as of 1Q15.

We also do not discount the possibility of debt funding in the event of M&A given its relatively low net gearing at 0.1x vs. industry average of 0.4x.

Outlook

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

COASTAL is awaiting its 2nd high-specification jack-up rigs due 2H of 2015, which has yet to secure a charter contract at the moment.

However, we understand that management is working very hard to close some deals soon. 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 sale of its first Jack up Drilling unit, which is profit making, freeing them from high asset costs upon delivery amid weak drilling market.

Forecast

We maintain our forecasts for now

Rating

Maintain OUTPERFORM.

Valuation

Our Target Price is maintained at RM3.47 pegged to an unchanged 9.0x CY16 PER.

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 - 29 Jun 2015