Following disappointing 1Q17 results, we slashed FY17- 18E earnings by 66-43% in view of slower vessel deliveries. We expect shipbuilding and repair segment to stay weak with no reprieve in the OSV market, but earnings could be cushioned by charter income from its JUGCSU. Reiterate MARKET PERFORM call with lower TP of RM1.32 pegged to 0.4x FY18 PBV.

Below expectations. The 1Q17 results came below expectations with core net profit of RM3.1m accounting only 3% of both our and street’s estimates. The disappointment was largely due to weaker- than-expected vessel deliveries. No dividend was declared as expected.

Only one vessel delivered in 1Q17. 1Q17 earnings plunged 77% in tandem with a 62% fall in revenue, no thanks to lower numbers of vessels sold. (1 unit vs. 10 units in 6Q16) but was partially offset by improvement in vessel chartering segment (bareboat charter income from the charter of JUGCSU). Note that its shipbuilding and repair division slipped into losses of RM11.2m in this quarter, dragged by the stubbornly high fixed cost amidst weak revenue. YoY, COASTAL’s core earnings dropped 93% from RM45.2m in Jul-Sep 2015 (which is the 3Q15) largely attributable to similar reason, lower vessel deliveries (1 unit vs. 7 units in 3Q16). Having said that, the earnings were partially offset by maiden contribution from JUGCSU in 2016. Recall that COASTAL recorded its first jack-up rig sale in 3Q16, lifting its quarterly revenue to an unusually high level of RM921.2m.

New JV to diversify its business risk. In earlier Nov, COASTAL entered into a joint-venture agreement with Polaris Holdings SARL to set up CN Energy Holdings Pte Ltd to pursue opportunities in offshore gas treatment projects worldwide for SGD5.0k (RM15.2k). We believe the proposed JV is positive in establishing a recurring income stream which will help reduce reliance on its weakening shipbuilding business. However, the offshore gas treatment project tender could be competitive given that limited jobs opportunities amidst prolonged weak oil prices.

Vessel delivery risk persists. We are guided that the JUGCSU is finally on hire after completing the commissioning stage in the Gulf of Mexico for PEMEX in August and has started receiving payments from client since October. 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 slashed our FY17-18E earnings by 66-43% after factoring in lower gross margins on shipbuilding segment following lower vessel delivery assumption in view of higher chances of vessel deferral.

Keep MARKET PERFORM. Post-earnings adjustment, we decided to switch our valuation model to PBV from PER due to the significant deterioration of near-term earnings prospect. This is also consistent with our sector valuation metric during challenging times. Our TP is now reduced to RM1.32 (from RM1.46 previously) pegged to 0.4x FY18 PBV, a discount to the sector average valuation due to its exposure in the oversupplied vessel market. 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 - 29 Nov 2016