We are negatively surprised by the non-consummation of the proposed Indonesian JV as we believe the deal is strategic to penetrate the growing Indonesian LNG market while establishing a new income stream which helps to reduce reliance on its weakening shipbuilding business. However, its healthy balance sheet allows COASTAL to continue searching for new opportunities. All in, we maintain MARKET PERFORM call with lower TP of RM1.46 pegged to CY17 PER of 8.0x after excluding earnings estimate from the proposed JV.

MOU expired with no concrete deal. Yesterday, COASTAL announced that the MOU with PT. Jaya Samudra Karunia Internasional (JSK) for the acquisition of 49% equity interest in PT. Jaya Samudra Karunia Gas (JSK Gas) for total consideration of USD20.8m (equivalent to RM83.6m) has expired and the proposed JV was not consummated. Recall that JSK Gas through its subsidiaries owns a Floating LNG Regasification Unit (FRU) with a maximum production capacity of 50 mmscfd and was awarded a 10-year firm charter contract with an extension option of 13 years to provide a Floating Storage Unit (FSU) to receive LNG from the LNG carrier on a scheduled basis.

Negatively surprised. We are negatively surprised by the news given that we believe the proposed JV is strategic to penetrate the growing Indonesian LNG market while establishing a recurring income stream which helps to reduce reliance on its weakening shipbuilding business. While the reason for dropping the deal is not disclosed, we have yet to obtain further clarification from the management.

Continue searching new opportunities. As of 6Q16, COASTAL’s net gearing of 0.03x is still relatively healthier than peers with an industry average of 0.5x. The healthy balance sheet with cash pile of RM529m allows COASTAL to continue searching for new opportunity in order to secure new source of income and serves as a strong factor to entice other players to collaborate with COASTAL.

Order book replenishment risk persists. COASTAL’s order book stands 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 had received more requests from clients to defer vessel delivery during the quarter which will 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.

Tweaked down earnings. We cut our FY17-18E earnings by 4% each financial year after excluding earnings estimates from both the ongoing FRU contract as well as impending contribution from FSU contract.

Maintain MARKET PERFORM. Post earnings adjustment, we lower our target price to RM1.46 from RM1.52 pegged to CY17 PER of 8.0x. Note that COASTAL is releasing its 1Q17 results end of the month and we do not discount the possibility of further earnings risk arising from weaker-than-expected vessel deliveries 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 - 1 Nov 2016