Coastal Contract  has  secured  MYR444m in contracts to build and sell seven  OSVs, which  could  boost its  orderbook to MYR2.6bn.  While this is within our estimate,  we view this positively given the  vessels’ higher average value.  Maintain BUY,  with our SOP FV at MYR5.90 (16x P/E). We  expect  it  to  book  recurring  income  from  the  gas  compressor  unit starting 2H15, while it is in talks for a long-term/spot charter for a rig.

Latest  offshore  supply  vessel  (OSV)  orders  imply  higherspecification  vessels.    According  to  its  announcement  to  Bursa Malaysia  last  Friday,  the  company  secured  MYR444m  in  contracts  for the  sale of seven OSVs. W e note that the vessels ordered are of  higher value, judging from the larger average  contract value of MYR63m vs the MYR44m  average  in  2011-2013.  We  opine  that  this  is  consistent  with management’s  guidance. In its 2Q14 briefing, management said  that  the company  expects  healthy  orders  for  mega-size  (480-men) accommodation  barges,  deepwater  multipurpose  vessels,  and  large anchor handling, tug & supply and platform supply vessels. 

No  changes  to  forecasts.  Its  YTD  orders  amount  to  MYR802m  (vs MYR1.4bn in CY13). If we expect the majority of the seven OSVs to bedue  for  delivery  in  FY15,  adding  the  recent  contract  wins  fulfills  our revenue  assumptions  for  FY14  and  makes  up  ~70%  of  our  FY15projection. Its total orderbook is now MYR2.6bn (vs MYR2.4bn in 1Q14), with  vessel  sales  at  MYR1.4bn,  and  MYR1.2bn  for  a  gas  compressor service unit to be chartered to Pemex for 12 years, from 2H15 onwards. 

Maintain BUY, SOP FV at MYR5.90 (16x FY15F P/E), which implies the warrants dilution and high gearing  expected upon the delivery of jack-up (JU) assets. We value  its  shipbuilding  unit  at 12x P/E,  gas compressor unit  using  a  DCF  approach,  and JU rig at 6x EV/EBITDA  –  in line with global shallow/deepwater rig players. Our SOP valuation reflects Coastal Contract’s quality assets and potential upside to recurring income. 

A key risk could be its first JU rig not being able to secure a contract for too  long  a  time  after  its  delivery  by  4Q14,  as  a  certain  degree  ofoperational  costs,  interest  and  depreciation  would  compress  earnings. Management is considering to  secure spot charters for the rig in SouthEast  Asia.  In  a  worst-case  scenario,  we  believe  the  company  may consider selling the JU rig, as there is interest from potential buyers.

Source: RHB