Coco’s  full-year  FY13  net  profit  of  MYR151.6m  beat  our/consensus’ estimate  by  9.5%/7.1%  on  better  margins.  YTD  orderbook  is  strong  at MYR2.5bn,  including  the 20-year drilling contract worth MYR1.24bn. We raise our FY14/15 forecasts by 33%/59% on expectations of better profit from  its  rig  and  shipbuilding  segments.  Maintain  BUY,  with  a  new MYR5.44 FV (from MYR3.77), based on a target FY14 P/E of 13x.

• FY13  full-year  results  beat  forecasts.  Coastal  Contract  (Coco)’s  fullyear net profit of  MYR151.6m beat both our and consensus’ estimates by 9.5%/7.1% respectively. We believe this is mainly due to: i) lower raw material  costs  as  steel  prices  had  remained  depressed  through  FY13,and ii) better profit margin derived from the selling of more sophisticated vessels during the year.
• Strong  4QFY13  showing.  Coco’s  FY13  full-year  revenue  growth  was flat. That said, 4QFY13 revenue jumped 32% y-o-y and 31% q-o-q, while 4QFY13  core net  profit  surged 73% y-o-y and  24% q-o-q,  driven by an increase in the number of vessels sold during the quarter.
• Healthy orderbook.  Including  a drilling rig contract  it  recently  clinched, Coco’s  orderbook  grew  to  MYR2.5bn  as  of  Feb  2014.  The  drilling  rig contract amounts to MYR1.24bn,  and  approximately MYR1.26bn  of the orderbook comes from the shipbuilding segment. The portion attributable to the shipbuilding is believed to be mostly due by FY14.  We have not included the 20-year drilling contract into our fair value estimate.
• Maintain BUY,  new MYR5.44  FV.  We  now  apply a higher target FY14 P/E of 13x  to value  the stock, on par with other small-  to mid-cap stocks to derive our new FV of MYR5.44 (from MYR3.77). We reaffirm our  view that  the  stock  should  be  re-rated  higher  as  it  has  transformed  into  an upstream  asset  owner.  Our  FY14/15  earnings  estimates  have  not incorporated  contributions  from  its  first  rig,  which  is  expected  to  be delivered to Coco by 2HFY14.
• FY13  full-year  results  beat  both  our  and consensus’  estimates  by  9%  and  7% respectively
• Better  profit  margin  drove  FY13  full-year earnings higher by 28%
• Approximately 50% of its current orderbook of MYR2.5bn consists of the rig charter contract
• JU  rig  charter  contract  to  provide  steady stream of income to Coco
• We  estimated  a  MYR0.49/share  contribution from the entire 20-year charter contract
• Approximately 50% of its current orderbook of MYR2.5bn consists of the rig charter contract
• Healthy  shipbuilding  orderbook  of approximately MYR1.26bn

FY13 full-year results beat forecasts
FY13  full-year  results  beat  forecasts.  Coco’s  full-year  net  profit  of  MYR151.6m beat both our and consensus’ estimates by 9%/7% respectively. FY13 net profit rose by an impressive 29% from MYR118.6m in FY12. We believe this was mainly due to: 
i)  lower raw material costs  as steel prices  had  remained depressed through FY13,and  ii)  better  profit  margin  derived  from  the  selling  of  more  sophisticated  vessels during the year. Hence, overall EBITDA margin improved strongly to  21% in FY13 vs 16% in FY12.

Strong 4QFY13 showing. Coco’s FY13 full-year revenue growth appeared to be flat. That said, 4QFY13 revenue  surged 32% y-o-y and  31% q-o-q, while 4QFY13  core net  profit  jumped  73%  y-o-y  and  24%  q-o-q.  Management  attributed  this  to  the 
increase in  the  number of vessels sold during the quarter  –  five units  were  sold in 4QFY13 vs four units in 4QFY12 (3QFY13: three units). This brought total number of vessels delivered in FY13 to 24 units vs 23 units in FY12.

Vessel chartering remains a non-core business. The segment posted a wider loss of  MYR1.6m  in  4QFY13  vs  a  MYR0.1m  loss  in  4QFY12.  On  a  full-year  basis,  it remained profitable with profit before tax (PBT) of MYR4.0m vs a mere MYR0.4m in FY12. Management cited a lower vessel utilisation rate and lower gains  derived from the sales of aged vessels.

Healthy orderbook with steady income 
Healthy  orderbook.  Including  a  drilling  rig  contract  it  recently  clinched,  Coco’s orderbook  grew  to  MYR2.5bn  as  of  Feb  2014.  The  drilling  rig  contract amounts  to MYR1.24bn,  and  approximately  MYR1.26bn  of  the  orderbook  comes  from  the shipbuilding  segment.  The  portion  attributable  to  the  shipbuilding  is  believed  to  be mostly due by FY14.

Officially a drilling rig owner  in  FY15.  COCO announced in early February  that  it had  clinched  a  MYR1.24bn  drilling  contract  from  a  group  of  Mexican  upstream contractors.  The  charter  contract  entails  the  supply  of  a  jack-up  (JU)  rig  with  gas compression capabilities to Petroleos Mexicanos, a state-owned oil & gas company in Mexico. The contract is for a  firm period of eight years, with an option to extend for up to 12 years.

Coco’s second rig will be delivered to Pemex in 1HFY15 and the charter contract is set to commence by 2HFY15. The JU rig will have the capability to manage sour gas for injection to the reservoir that it is commissioned to,  in order to maintain pressure and production rate.

Our calculation suggested that the drilling contract shall contribute MYR0.50  to  our fair  value  estimate  when  we include the following considerations: i) daily charter rate of USD150,000/day, ii) average working day of 350 days/year for the rig,  and iii)  the entire  charter  contract  period  of  20  years.  As  the  rig  is  built  to  the  oilfield’s specifications, we see little risk that the charter may not be extended to its maximum. Demand  for  OSVs  remains  resilient.  Excluding  the  rig  charter  contract,  Coco’s current orderbook for shipbuilding stands at MYR1.26bn. We believe nearly the entire orderbook is set to be delivered by this year. 

We believe  that: i) the average selling price (ASP) per vessel could have risen by 20-25% for vessels set for FY14 delivery, and ii) nearly the entire fleet is made up of new vessels, equipped with Coco’s new and improved technology. Management has always stressed on its aim to build and supply vessels equipped with better specifications to drive earnings and profitability. We also believe that Coco will indirectly benefit from the industry’s: i) MYR10bn worth of topside major maintenance and hook-up & commissioning and construction (TMM & HuCC) projects,  and ii) MYR10bn worth of transport & installation (T&I) projects. Both umbrella contracts were awarded last year. We understand from some of the companies involved in the respective contracts  that activities have not reached full swing at this juncture, partly awaiting required vessels to start major execution of the contracts.  Therefore,  we  believe  domestic  demand  for  offshore  support  vessels (OSV) will remain healthy in the medium term.

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Company Profile

Coastal  Contracts  is  an  established  shipbuilder  in  Malaysia  that  specialises  in  offshore  support  vessels  (OSVs)  as  well  as  marine transportation vessels

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Source: RHB