• Initiate coverage with BUY, and a TP of MYR2.14, 26% upside. Our TP of MYR2.14 is pegged to 9x FY23F (Jun) P/E, ie at its 5-year mean, and is inclusive of a 2% discount based on its ESG score of 2.9. We are upbeat on this stock, on the basis of its long-term recurring income business model and Coastal establishing itself as a gas processing player – which could lead to more contract wins.

• Heavyweight gas processing division. Coastal’s game plan in building a recurring income stream through its gas division started with the acquisition of a jack-up gas compression service unit (JUGCSU), which is currently the major contributor to group revenue and earnings – it generates an annual topline of c.MYR130m. Although the unit’s contract is set to expire in Nov 2023, there is a good chance of it being extended, due to its consistent production rate, along with Pemex requiring eight JUGCSUs (only has two in operation). Coastal then secured two JV projects to provide engineering, procurement, construction, operation and maintenance services (EPCOM) in Mexico. The first contract is the onshore gas-sweetening Perdiz plant, which started operations in Jul 2021 and is now operating at the optimal level production capacity, with a c.MYR55-95m pa in gross EBITDA.

• Earnings boost in FY23. The second onshore gas conditioning contract on the Ixachi field is valued at MYR4.5bn, with a split of c.MYR1bn for the engineering, procurement, construction and commissioning (EPCC) and c.MYR3.5bn for the operations and maintenance (O&M). Gross EBITDA pa is estimated at MYR120-200m, matching the field production curve. This new plant is scheduled for completion in 1QFY23 (now 70% done) while the operation and maintenance contract will cover 10 years.

• Clearer coast for vessel chartering. Coastal’s venture into the liftboat business in 2021 has helped its chartering division, delivering c.MYR41m topline pa, making it the main contributor. The contract has been extended, with an upward revision on its charter rate for a firm period of two years with 2-year annual extension options (set to commence in Sep 2022).

• Earnings estimates and valuation. We forecast an earnings increase of 9.7% YoY for FY23, mainly driven by income from the EMC Papan Plant which is split into 10:90 for FY22 and FY23 as it is recognised on a milestone basis. Profit for FY24 will decrease, due to the absence of EPC earnings coupled with the assumption of a downside charter rate upon the JUGCSU’s contract extension. FY24 will be anchored by gas processing earnings – a strong indicator of Coastal’s effective recurrent income strategy. The group has a healthy balance sheet with a net cash position of MYR142.9m (0.27 per share) as of 3Q22. We ascribe a 9x FY23F P/E, imputing a 2% ESG discount due to the lack of GHG emission disclosure as well as a solid environment roadmap. Note that Coastal is working to address both matters. Key downside risks include contract terminations by Pemex, significantly lower-than-expected oil prices that could limit client spending, as well as higher-than-expected operating costs.

Source: RHB Research - 1 Aug 2022