Period

2Q15/1H15

Actual vs. Expectations

1H15 results came broadly within expectations with net profit of RM100.7m making up of 42.7% and 45.8% of our and consensus full-year estimates, respectively, as we are expecting a stronger 2H performance with disposal gain of its first Jack up unit to be recognised.

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

Dividends

2.0 sen first single-tier DPS was declared for the quarter, below our expectations of 9.1sen, at 22% of our full-year forecast.

Key Results Highlights

2Q15 net profit declined by 27.8% YoY to RM34.8m from RM48.2m in 2Q14 due to lower number of vessel deliveries of 3 units in the quarter vs. 6 units last year amid a weaker general OSV market. However, profitability of the group remained largely intact with its shipbuilding PBT margin at 20.2% in the quarter (20.5% in 2Q14).

Sequentially, 2Q15 net profit weakened 47.2% QoQ due to lower shipbuilding revenue contribution caused by lower OSV vessel deliveries (3 units in the current quarter vs. 5 units in the previous quarter). This is despite improvement in Shipbuilding segment’s PBT margin to 20.2% from 18.8%, possibly driven by more favourable USD/MYR trend.

For 1H16, however, core net profit improved slightly by 3.4% YoY to RM100.7m from RM97.4m previously due to higher value of vessels sold in the period under review, driving 10.3% YoY growth in its top line. However, a slight drop in PBT margin to 19.6% from 21.2% partially due to weaker shipbuilding margins in 1Q15 offset the growth in revenue.

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 and we opine that disposal of rig is the likelier scenario.

Recall that 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 the RM1.3b Gas rig contract, the group’s orderbook stands at RM1.1b providing earnings visibility until 2017 amid the 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

FY16 CNP is reduced by 14.3% to RM175.5m from RM204.8m previously as we lower our vessel order replenishment assumption to RM600m from RM800m previously in view of the weak OSV market in the near-term.

Rating

Maintain OUTPERFORM.

Valuation

Post changes in forecast, fair value is cut to RM2.31 from RM3.47 previously pegged to a lower CY16 PER of 7x (from 9x previously) in view of market de-rating amid oil prices downtrend resumption.

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 - 26 Aug 2015