COASTAL reported FY17 earnings, which beat expectations with stronger other income and higher vessel delivery. Having said that, we opted to maintain our FY18-19E earnings forecasts given its dwindling order-book in the absence of new orders. Reiterate MARKET PERFORM call with lower TP of RM1.25 pegged to 0.35x FY18E PBV as shipbuilding and repair segment is expected to stay weak with no reprieve in the OSV market.

Above expectations. The FY17 results came above expectations with core net profit of RM75.2m exceeding our full-year earnings forecast by 76%. The outperformance was largely due to higher-than-expected other income and higher-than-expected vessel delivery. Second interim dividend of 1.0 sen/share was declared, bringing its full-year DPS to 2.0 sen, which is also higher than our expectation of 1.0 sen.

4 vessels delivered in 4Q17. In tandem with revenue jump of 2.4x QoQ, 4Q17 earnings increased by 50% QoQ to RM40.3m after adding back impairment on inventories of RM26.1m thanks to higher number of vessels delivered (4 units vs 2 units in 3Q17). YoY, core earnings also jumped 1.0x from RM19.9m in Apr-Jun 2016 (which is 6Q16) largely attributable to better margins from vessels delivered (14.9% vs 5.4%) despite lower number of vessels delivered (4 units vs. 10 units in 6Q16) as well as higher income from JUGCSU (+28%). Cumulatively, FY17 core net earnings declined 21% YoY to RM75.2m from RM94.8m in the previous corresponding twelve months (Jul 2015- Jun 2016) dragged by lower number of vessels delivered (8 vessels vs 20 vessels) 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 RM1,293.6m in Jul 2015-Jun 2016.

Dwindling order-book without new orders. We expect the JUGCSU chartered to PEMEX in the Gulf of Mexico will be the main earnings driver in the near term backed by steady payment from clients since October last year. Meanwhile, the shipbuilding and repair division is likely to stay lacklustre, lacking new orders from ship services players as the OSV market is still reeling from an oversupply situation. The remaining order-book of c.RM600m will still be subject to delivery risks as clients may opt to defer their orders.

Second JUGCSU is the re-rating catalyst. Recall that COASTAL has entered into a joint-venture agreement with Polaris Holdings SARL to pursue opportunities in offshore gas treatment projects worldwide. However, the offshore gas treatment project tender could be competitive, in our view, given the limited jobs opportunities amidst a prolonged weak oil price. On the other hand, we believe the project sanction of second JUGCSU could be a re-rating catalyst to COASTAL given its advantage of operating the first unit if Pemex were to proceed with this project.

Maintaining earnings forecasts. Despite FY17 results surpassing our expectations, we maintain our FY18-19E earnings of RM38.8m and RM46.0m, respectively, in view of falling order-book from the shipbuilding segment.

Keep MARKET PERFORM. All in, we maintain MARKET PERFORM call on the stock with lower TP of RM1.25 (from RM1.45 previously) pegged to lower 0.35x FY18E PBV (from 0.45x previously), a deeper discount to the sector average valuation due to its exposure in the oversupplied vessel market (no new orders announced since February last year). Downside risks to our call include: (i) lower-thanexpected margins and vessel sales, and (ii) delay or cancellation of jack-up rig gas compression unit.

Source: Kenanga Research - 5 Sept 2017