COASTAL reported 1H18 core earnings jumping 2.5x, which came as no surprise, thanks to: (i) better product margins narrowing shipbuilding losses despite flattish vessel delivery, (ii) lower interests, and (iii) better marine chartering division. No changes to estimates but upgrade COASTAL to OP call with an unchanged target price of RM1.45 following recent share price weakness. A potential laggard with undemanding valuation and healthy balance sheet.

Within expectations. Stripping off RM15.4m forex loss, 1H18 result came within expectation with core net profit of RM18.2m at 47% of our full-year earnings forecast. No dividend, as expected.

One vessel delivered in 2Q18. 2Q18 earnings leapt by 39% QoQ to RM10.6m, thanks to: (i) narrowed losses by 18% from shipbuilding and ship repair segment helped by better product margins amidst a similar number of vessel delivered of one unit and better vessel chartering (+9%; better operating efficiency and disposal gain of old vessel).

YoY, core earnings also soared by 3.0x from RM2.7m thanks to: (i) stronger vessel chartering business (+30%) on the back of the stable long-term bareboat charter of Jack-Up Gas Compression Service Unit (JUGCSU), (ii) narrowed losses from shipbuilding and ship repair segment (-32%; better product margins despite flat vessel delivery), and (iii) lower interest cost (-13%). Cumulatively, 6M18 CNP jumped 2.5x to RM18.2m due to the abovementioned reasons.

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.

Second JUGCSU is the re-rating catalyst. Recall that COASTAL has entered into a JV 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 rerating 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 RM38.8-46.0m, as we expect a higher number of vessels to be delivered in the next few quarters.

Upgrade to OUTPERFORM. We upgrade COASTAL to OP call with an unchanged TP of RM1.45 pegged at 0.4x FY19E PBV following its recent share price weakness premised on stabilization of oil prices above USD60/bbl to: (i) incentivise clients to take delivery of new vessels reducing the odds of deferral, and (ii) enhance the chances of project sanction of the second JUGCSU by Pemex as well as being a potential laggard with undemanding valuation backed by strong balance sheet (net gearing of 0.01x as of 2Q18). 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 - 28 Feb 2018