Following the disappointing 1H17 results, we slashed FY17-18E earnings by 23-26% 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 RM1.43 pegged to 0.45x FY18 PBV.

Below expectations. The 1H17 results came below expectations with core net profit of RM8.0m accounting for only 23%/9% of both our and street?s estimates. The disappointment was largely due to weaker-than-expected vessel deliveries. A 1.0 sen NDPS (ex-date: 10 Mar, payment date: 28 Mar) was declared, which is lower than the 2.0 sen in the corresponding period last year.

Only one vessel delivered in 2Q17. 2Q17 earnings surged 58% despite a 23% fall in revenue, thanks to: (i) better gross margin achieved for vessel delivered, and (ii) lower interest expense. YoY, core earnings dropped 63% from RM13.3m in Oct-Dec 2015 (which is the 4Q16) largely attributable to a lower number of vessels delivered (1 unit vs. 2 units in 4Q16). Having said that, the earnings were partially offset by maiden contribution from JUGCSU in 2016.

Cumulatively, 1H17 core net earnings tanked 86% YoY to RM8.0m from RM58.5m in the previous corresponding six month (Jul-Dec 2015) due to the above-mentioned reason but was cushioned by earnings contribution from vessel chartering segment. Recall that COASTAL recorded its first jack-up rig sale in 3Q16, lifting its quarterly revenue to an unusually high level of RM1094.9m in Jul- Dec 2015.

New JV incorporated in Jan 2017. In earlier Nov last year, 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 the limited jobs opportunities amidst a prolonged weak oil price. Note that the incorporation of CN Energy has been completed in January 2017.

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 and vessel delivery risks as clients may opt to defer their orders.

Cut earnings forecasts. We slashed our FY17-18E earnings by 23-26% 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 cut, we maintain MARKET PERFORM call on the stock with lower TP of RM1.43 (from RM1.45 previously) pegged to unchanged 0.45x 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 - 28 Feb 2017