With no surprises in 18M16 results, we believe COASTAL’s recurring income is gradually taking off with the on-hire of JUGSU and the recently proposed acquisitions to penetrate Indonesian LNG market. However, order book replenishment and vessel delivery risks persist amidst the challenging environment. Thus, FY17-FY18 estimates are trimmed to account for weaker margins. Reiterate MARKET PERFORM call with lower TP of RM1.52 pegged to 8.0x CY17 PER.

On the dot. The 18M16 results came within expectations with core net profit of RM186.3m on the dot of our estimate and lower than consensus by 5%. A 1.0 sen/share dividend (ex-date: 13th Sep 2016) was declared, bringing its full year DPS to 5.0 sen, as expected.

10 vessels delivered in 6Q16. 6Q16 core net profit strengthened by 22% QoQ to RM19.9m from RM16.4m in 5Q16, underpinned by a higher number of vessels sold (10 units in 6Q16 vs. 1 unit in 5Q16) and improvement in vessel chartering segment (bareboat charter income from the charter of JUGCU). YoY wise, COASTAL’s core earnings dropped 30% from RM28.5m in 2Q16 largely attributable to weaker margins from the vessels delivered despite having higher deliveries in 6Q16 (10 units vs. 3 units in 2Q16). Having said that, the earnings were partially offset by maiden contribution from JUGCU in 2016. Cumulative YoY comparisons are not available due to the changes in financial year-end.

JUGSU finally on hire. We are guided that the JUGCSU is finally on hire after completing the commissioning stage in the Gulf of Mexico for PEMEX in August. Recall that the charter contract spans a period of eight years, with an option to extend for an additional four years. We estimate the project to contribute RM120m to COASTAL’s top line.

Order book replenishment risk persists. COASTAL’s order book stood at RM2.3b, of which RM837m is attributable to OSV fabrication spanning until CY17 while the remaining RM1.5b are the JUGSU charter contract. Despite having long-term recurring income from vessel chartering, we believe COASTAL is still facing order book replenishment risk and vessel delivery risk as clients may opt to defer their orders.

Cut earnings forecasts. We trimmed down FY17-18E earnings by 7- 4% after factoring in: (i) lower gross margins on shipbuilding segment to 12% from 14% previously, and (ii) lower finance cost.

Keep MARKET PERFORM. Post earnings downgrade, we lower our target price to RM1.52 pegging to an unchanged CY17 PER of 8x. MARKET PERFORM call reiterated given its net debt position of 0.03x in 6Q16 vs. industry average net gearing of 0.6x as well as the long-term recurring income business model taking off. We believe the 49% stake acquisition in JSK Gas, which is expected to be completed by end of CY16 is strategic to penetrate the growing Indonesian LNG market which helps to reduce its reliance on shipbuilding.

Downside risks to our call include: (i) lower-than-expected margins and vessel sales, and (ii) delay or cancellation of jack-up rig gas compression unit.

Source: Kenanga Research - 30 Aug 2016