The seemingly poor set of 1Q18 results is deemed within expectation as we expect higher number of vessels to be delivered on the back of better oil prices in the new few quarters. While maintaining our FY18-19E earnings forecasts, we reiterate MARKET PERFORM call with higher TP of RM1.45 pegged to 0.4x FY19E PBV in view of limited re-rating catalysts in the near term.

Deemed within expectations. 1Q18 result is deemed within expectation with core net profit of RM3.3m despite only accounting for 8% of our full-year earnings forecast. This is because we are expecting a surge in vessel delivery in the next few quarters. No dividend, as expected.

One vessel delivered in 1Q18. In tandem with 78% decline in revenue, 1Q18 earnings decreased by 92% QoQ to RM3.3m, no thanks to lower number of vessels delivered (1 unit vs. 4 units in 4Q17). Note that the shipbuilding and ship repair segment slipped into RM13.3m losses from RM27.3m operating profit in 4Q17 as a result of stubbornly high fixed cost.

YoY, core earnings also improved by 6% to RM3.3m helped by; (i) higher contribution from vessel chartering business (+6%) on the back of the stable long-term bareboat charter of Jack-Up Gas Compression Service Unit (JUGCSU) and lower administrative expenses (-30%). This helps to cushion widening losses of its shipbuilding and ship repair segment (+19%) which delivered lower margined vessel in this quarter.

Dwindling order-book without new orders. We expect the JUGCSU chartered to PEMEX in the Gulf of Mexico to be the main earnings contributor in the near term backed by steady payment from clients since October 2016. Meanwhile, the shipbuilding and repair division is likely to stay lacklustre, lacking new orders from services players as the OSV market is still reeling from an oversupply situation. The remaining order-book of less than 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 at this juncture. 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. We are maintaining our FY18-19E earnings of RM38.8m and RM46.0m, respectively, as we expect a higher number of vessels to be delivered in the next few quarters.

Keep MARKET PERFORM. The recent rally in oil prices is positive to the oil and gas sector. Although it may not directly benefit shipbuilder like COASTAL, we believe it incentivise clients to take delivery of new vessels, reducing the odds of deferral. All in, we maintain MARKET PERFORM call on the stock with higher TP of RM1.45 (from RM1.25 previously) after rolling over our valuation base year to FY19E and pegging a higher 0.4x PBV (from 0.35x previously). Such discount is still relatively conservative at -1SD to its 5-year average valuation given its exposure in the oversupplied vessel market (no new orders announced since February 2016).

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 - 23 Nov 2017