We came away from COASTAL’s 6Q16 briefing feeling concerned over its increasing vessel deferral enquiries. However, we believe its recurring income stream is gradually taking off with the on-hire of JUGSU and the recent proposed acquisitions to penetrate Indonesian LNG market while a healthy balance sheet allows COASTAL to explore further opportunities. Thus, there are no changes to our earnings estimates and we reiterate our MARKET PERFORM call with a lower TP of RM1.52 that pegged to 8.0x CY17 PER.

More projects in the future? We believe the 49% stake acquisition in JSK Gas is strategic to penetrate the growing Indonesian LNG market which helps to reduce its reliance on shipbuilding. This is positive to COASTAL as it widens the opportunity to seek for more LNG-related projects to establish stable recurring income in the long run should the collaboration succeed.

JSK Gas acquisition to be completed by 4QCY16. COASTAL is expecting to complete the acquisition by 4QCY16. The FRU, under a 5-year Build, Operate and Transfer Agreement has commenced operations in 2Q16 to supply regasified natural gas to the 200MWh power plant operated by PT Indonesia Power in Bali, Indonesia while the FSU with 10-year firm charter contract plus an extension option of 13 years is still under construction, slated for delivery by earliest end of 2017.

More deferral enquiries. 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. Meanwhile, COASTAL received more requests from clients to defer vessel delivery during the quarter which would cast further weakness and uncertainty on its shipbuilding segment in view of prolonged vessel oversupply issue resulting from low offshore activities. We believe COASTAL most probably will allow these deferrals without any substantial penalty in order to preserve client relationships.

Healthy balance sheet. As of 6Q16, COASTAL’s net gearing of 0.03x is still relatively healthier than peers with an industry average of 0.5x. Despite so, COASTAL is currently focusing on cash conservation while seeking for new opportunity to establish new source of income. We reckon such healthy balance sheet is a strong advantage to entice other players to collaborate with COASTAL.

Maintain MARKET PERFORM. We are maintaining our FY17-18E earnings forecast, but we do not discount the possibility of further earnings risk arising from weaker-than-expected vessel deliveries. Maintain MARKET PERFORM call with an unchanged target price of RM1.52 that pegged to CY17 PER of 8x.

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

Source: Kenanga Research - 7 Sep 2016