• Stay BUY, new MYR2.35 TP from MYR2.14, 27% upside. FY22 (Jun) exceeded our and Street’s estimates. The strong results should help Coastal Contracts establish itself as a gas processing player – gearing it for more project wins. We believe FY23 will see earnings growth due to the completion of the EMC Papan plant and a better vessel chartering segment.

• Above expectations. At 108% and 112% of our and Street’s full-year estimates, Coastal’s FY22 core earnings of MYR125.9m (+53% YoY) came in above expectations. Note: This is on the basis of full earnings from a JV, as the share transfer will only be completed in 2QFY23.

• Coastal booked a core profit of MYR51.7m in 4QFY22 (+38% QoQ, +>100% YoY) on a stronger vessel chartering segment (PBT rose >100% from MYR0.6m to MYR4.6m, excluding a one-off MYR33m gain on the disposal of its OSV). This was supported by narrower losses from its shipbuilding and ship repair unit. Its gas processing arm recorded a MYR78.9m PBT on higher interest income earned from loans granted to a JV and greater share of profit. As anticipated, borrowings increased in FY22 to facilitate the EPC of the EMC Papan plant. We expect the company to return to a net cash position in 2QFY23 as EPC billings come in.

• Outlook. Note: We will be seeing a one-off loss on disposal of effective interest in the joint arrangement following the share transfer in 2QFY23. Our FY23F earnings reflects Coastal’s 50% stake in the JV. Its gas processing wing is expected to boost FY23 earnings on the completion of the EMC Papan plant (70% done as at end July). The strong earnings will be aided by greater contributions from its vessel chartering segment, in our view, coming from the full contribution of a new charter contract for its harbour tug. The liftboat’s contract extension, which is set to commence in September, will also lift the segment’s earnings on upward charter rates. Furthermore, management guided that the bidding for a smaller-sized project, an oil processing platform, might open in 2H22.

• Maintain BUY, new TP of MYR2.35, pegged to a 9x FY23F P/E (at its 5- year mean). We raise our earnings estimates by 10% and 5% for FY23- FY24 after adjusting PBT margins for the vessel chartering wing. To reiterate from our previous report, FY24 will see a decline due to the absence of EMC Papan plant’s EPC earnings along with the assumption of a decreased charter rate, based on the extension of the jack-up gas compression service unit or JUGCSU contract. We introduce our FY25F earnings with an assumption of a contract extension for the Perdiz plant. The new TP is inclusive of a 2% discount based on an unchanged ESG score of 2.9, considering there is no further development on the subject. Key risks include contract termination by Pemex, slower-than-expected progress billings, and higher-than-expected operating costs.

Source: RHB Research - 1 Sep 2022