• BUY, new MYR2.40 TP from MYR2.35, 26% upside. Post yesterday’s briefing where its net zero roadmap was unveiled, we upgrade the ESG score to 3.0 from 2.9. We continue to like Coastal Contracts for its recurring income business model post its pivot into gas processing, alongside potential upsides from more project wins. We should also see FY23 (Jun) earnings growth on the completion and commissioning of the Papan plant.

• ESG roadmap. Coastal has unveiled its sustainability goals to reach net zero by 2050. The group is focusing on investments into production-related infrastructure projects, with a preference for natural gas – it is a cleaner energy source with lesser greenhouse gas emissions. Coastal is also establishing a medium- to long-term plan for diversification into the renewable energy sector.

• Potential contract extensions. Management is optimistic on possible extensions for contracts due to expire in 2024. The firm period for the jack- up gas compression service unit (JUGCSU) is until Feb 2024. The group is looking to seal a first extension of up to three years and possible subsequent extensions of up to 5-7 years on the basis of the JUGCSU being a key asset for Pemex’s oil enhancement recovery process. The contract for the Perdiz plant is also expected to extend at a minimum of three years following the Ixachi field’s forecasted gas production peak level (c.1,100mmscfd), which is projected to be in 2026-2028. Meanwhile, the Teras Conquest 7 vessel recently obtained an extension for a firm period of two years with two years annual extension options.

• Papan plant progress. Commissioning for the plant is projected to start in 2QFY23, with the overall construction progress at 83% (permanent primary infrastructure at 74% and plant at 87%). As of FY22, Coastal has billed in USD18.2m for the permanent primary infrastructure – the remaining c.USD201.8m will be billed in FY23. All payments are expected to be received by 3QFY23, which should ease the group’s gearing.

• JV prospects. Coastal is tendering for an oil processing plant project, which could be awarded in 4QCY22. For the third Ixachi gas conditioning plant, tendering is believed to be open at either end 2022 or early next year. Other longer-term projects include a gas dehydration plant and gas storage project. We believe there is a good chance for Coastal’s JV company to win these projects, given its track record with Pemex.

• Stay BUY. We maintain our earnings estimates, but lift TP to MYR2.40 (pegged to an unchanged 9x FY23F P/E, at its 5-year mean) as we ascribe a 0% ESG premium/discount. Given that the group now has a net zero roadmap, its new ESG score of 3.0 (2.9 previously) stands at the country median, based on our proprietary methodology. Key risks to our call include contract termination by Pemex, slower-than-expected progress billings, and higher-than-expected operating costs.

Source: RHB Research - 7 Sep 2022