Period

3Q16/9M16

Actual vs. Expectations

9M16 results were below expectations with net profit of RM136.7m making up 57.9% and 64.9% of our and consensus full-year estimates, respectively, after excluding: (i) inventories write down of RM56.7m, and (ii) forex exchange gain of RM44.5m.

The negative variation was mainly due to the imputation of earnings contribution from the jack-up gas compression unit with PEMEX in our forecast, which did not materialise.

Dividends

No dividend was declared as expected.

Key Results Highlights

3Q16 net profit declined by 16.8% YoY to RM45.2m from RM54.3m in 3Q14 due to margins derived from different vessel sale mix, although revenue jumped 3.9 times arising from the sale of its first jack-up rig.

Sequentially, 3Q16 net profit strengthened 58.3% due to stronger revenue contribution from the first jack-up rig sale as well as possibly driven by the more favourable USD/MYR trend.

For 9M16, however, core net profit dropped by 9.9% YoY to RM136.7m from RM151.7m previously due to lower number of vessels sold (12 units in 9M16 vs. 11 units in 9M14) in the period under review, despite the doubling of its top line.

Outlook

COASTAL has delayed the delivery on its 2nd jack-up rig to be mid-2016, but it could be delay further. At the moment, the management is looking to either charter out or dispose the rig to reduce their risk exposure if no contract is secured.

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

However, we believe vessel order replenishment will continue to be slow, pressurising its shipbuilding earnings going forward.

Maiden full-year contribution from the jack-up gas compression unit chartered to PEMEX on long-term contract will be felt next year, thereby partially offsetting weakness in the shipbuilding segment.

Moreover, COASTAL could be securing more projects from PEMEX if they are able to execute the first gas compression unit project successfully.

On a separate note, COASTAL announced changing their financial year end from Dec 31 to June 30.

Change to Forecasts

Following the change in financial year-end from Dec 31 to June 30, we adjusted our FY16E revenue and earnings higher to RM1,935.8m and RM258.9m factoring in 18 months of financial reporting.

The tweak also includes adjustment of: (i) delayed earnings contribution from the jack-up gas rig from 4Q16 to 5Q16, and (ii) lowering our vessel order replenishment assumption to RM300m from RM600m in CY16 previously in view of the weak OSV market in the near-term.

Rating

Downgrade to MARKET PERFORM from OUTPERFORM due to weak outlook in shipbuilding segment

Valuation

Post changes in forecast, fair value is cut to RM1.99 from RM2.31 previously, pegged to a higher CY16 PER of 8x (from 7x previously) in view of better prospect in securing more gas rig projects from PEMEX.

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 Nov 2015