The Edge Financial Daily  reported today that  Coastal Contracts (COCO) is  acquiring  its  first  jack-up  drilling  rig  for  USD200m  (MYR641m). Assuming  an 80:20 debt-to-equity ratio, COCO’s balance sheet will be leveraged  up  to  some  0.46x  net  gearing  based  on  its  latest  quarterly numbers.  Given  the  change  in  the  company’s  earnings  dynamics,  we upgrade  the  stock  to  a  BUY  from  NEUTRAL,  as we  raise  the  PE  ratio from 8x to 10x. Our FV is thereby nudged up to MYR3.00 from MYR2.33.

- Buying its first jack-up rig. COCO’s new jack-up rig Friede & Goldman JU2000E  is a high-specification jack-up rig priced  at a  5%-10%  discount compared  to  Seadrill’s  acquisition  price  for  the  same  jack-up  rig  this year. 

- Positive for FY15 earnings.  The article mentioned that COCO will only take delivery  of  the  jack-up  rig  in  2H14  (likely  end-3Q14). Assuming  a current  daily  rate  of  USD150k-USD160k,  this  would  boost  COCO’s earnings by some MYR30m-MYR40m per annum, increasing our FY15 estimates  by  20%-26%.  We  do  not  envisage  much  challenge  for  the jack-up  rig  to  be  chartered  out  given  Petronas’  preference  for  locally owned jack-up rigs over foreign-owned ones. 

- Net  gearing  ratio  raised  to  0.46x.  Assuming  an  80:20  debt-to-equity ratio, COCO’s balance sheet will be leveraged up to some 0.46x based on  its  latest  financial  statement.  It  will  need  to  take on  MYR512.8m  in new debt and fork out MYR128.2m in cash.

- Upgrade  to  BUY.  We  believe  that  our  valuations  are  justified  as  our valuation at 10x P/E (8x previously) is still at a discount to other offshore asset owners under our coverage at 14x P/E,  coupled with the fact that the dynamics of the COCO’s earnings  have now changed from a buildand-sell business to a recurring-income business. Given the significant upside  (+102.7%)  to  our  FV,  we  upgrade  the stock  from  NEUTRAL  to BUY, with a higher FV of MYR3.00.

Source: RHB