• Stay BUY, new MYR2.68 TP from MYR2.40, 20% upside. Coastal Contracts’ 1QFY23 (Jun) results are above expectations, due to stronger contributions from the EPC Papan plant. Our outlook remains positive, premised on upcoming contract award announcements – in which we believe the company stands a chance of winning some jobs, due to its strong track record with Pemex.

• 1QFY23 results are above estimates. On the basis of a completed JV share transfer, Coastal’s recorded core profit of MYR78.4m is at 56-54% of our and Street’s full-year forecasts.

• Results review. 1QFY23 revenue decreased to MYR51.9m (-10.6% QoQ, -0.3% YoY) due to lower contributions from the vessel chartering segment in consequence to the expiration of a short-term charter contract in 4QFY22. With lower fleet utilisation, the segment booked a MYR5.1m pre-tax loss. EBITDA dropped by 36.6% QoQ due to elevated other income booked in 4QFY22 from the disposal gain. Nonetheless, 1QFY23 core earnings increased to MYR78.4m (+125% QoQ) from MYR34.8m, driven by a higher JV share of profits, as billings for the Papan plant have started to roll in. We are also expecting a cumulative one-off JV loss on the disposal (MYR93.8m as of 1QFY23) in 2QFY23-3QFY23.

• Papan plant update. Construction is now completed, and the group is currently in the commissioning phase – a process that usually takes 1-2 months. Hence, we anticipate the plant achieving first gas by the end of 1QCY23. To date, management has guided that USD108m (out of USD220m) of the EPC payment has been collected, and it is expecting to receive the rest in 2QFY23-3QFY23.

• Outlook. Coastal previously stated its strategy to focus on production- related infrastructure and, with a promising OSV market, the group is optimistic on disposing all of its OSVs in the next 12 months. At the moment, it is tendering for an oil processing plant and the third Ixachi gas conditioning plant, which is expected to be announced in 1QCY23. This is anticipated with the recent announcement made by Pemex CEO Octavio Romero Oropeza of his plans to stop gas flaring, as reported by Reuters. We believe Coastal has a high chance of securing the third gas Ixachi plant contact, following the success of the Perdiz and Papan plants.

• We increase our TP to MYR2.68 (pegged to 9x CY23F P/E, at its 5-year mean) and lift our earnings estimates to account for higher net margins from the Papan plant EPC job. We ascribe a 2% ESG discount to Coastal’s intrinsic value to derive our TP. Its 2.9 ESG score is due to its failure to disclose greenhouse gas emissions amid unveiling its new sustainability roadmap. Downside risks: Contract terminations by Pemex, slower-than- expected progress billings, and higher-than-estimated opex.

Source: RHB Research - 1 Dec 2022