With no vessel delivered in 3Q18, 9M18 results fell below our expectation with core earnings contracting 15% YoY to RM25.3m. Following that, we slashed our FY18-19E earnings by 17-14% and TP is lowered to RM1.40 from RM1.45 pegged to unchanged 0.4x FY19E PBV. Still an OP call backed by undemanding valuation and healthy balance sheet.

Below expectation. Stripping off RM32.2m forex loss, 9M18 core profit of RM25.3m came below expectation which made up 65% of our fullyear earnings forecast. The negative deviation is largely attributable to weaker-than-expected vessel delivery. No dividend, as expected.

No vessel was delivered in 3Q18. 3Q18 earnings fell by 33% QoQ to RM7.1m, no thanks to widened losses by 2.1x from shipbuilding and ship repair segment with no vessel delivered during the quarter vs. 1 vessel delivered in 2Q18.

YoY, core earnings tanked by 71% from RM24.7m largely marred by: (i) weaker vessel chartering business (-27%; weakening of USD against MYR), and (ii) poorer shipbuilding and ship repair segment which sank into RM22.6m operating losses from RM9.4m profit in 3Q17 on lower vessel delivery (2 units in 3Q17). Cumulatively, 9M18 CNP dropped by 15% to RM25.3m due to the abovementioned reasons overwhelming lower finance cost (-21%) and taxation expense (-14%).

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.

Slashed FY18-19E earnings by 17-14%. We are downgrading our FY18-19E earnings by 17-14% factoring lower revenue recognition from shipbuilding and ship repair segment due to slower vessel delivery.

Maintain OUTPERFORM with lower TP. Following our earnings cut, we lower our TP to RM1.40 from RM1.45 previously pegged at unchanged 0.4x FY19E PBV. We are keeping our OP call on the stock premised on stabilization of oil prices above USD70/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 its strong balance sheet (net gearing of 0.05x as of 3Q18). 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 - 25 May 2018