RHB Investment Research Reports
Coastal Contracts - Higher Perdiz Contract Value; Keep BUY
rhbinvest
Publish date: Thu, 05 Jan 2023, 11:09 AM
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An official blog in I3investor to publish research reports provided by RHB Research team.
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All materials published here are prepared by RHB Investment Bank Bhd. For latest offers on RHB Invest trading products and news, please refer to: http://www.rhbinvest.com
RHB Investment Bank Bhd
Level 3A, Tower One, RHB Centre
Jalan Tun Razak
Kuala Lumpur
Malaysia
Tel : +(60) 3 9280 8888
Fax : +(60) 3 9200 2216
- Keep BUY, new MYR2.76 TP from MYR2.68, 11% upside. The revised unit price for gas sweetening services brings in higher recurring income for Coastal Contracts and continues to strengthen its position in the Mexico landscape. This will help the group in its future bids for projects with Pemex, in our view, as the national oil company continues to ramp up production and tackles its gas flaring issues.
- Expansion of plant capacity. In 2QFY22 (Jun), Coastal’s sweetening Perdiz plant was modified to expand its processing capacity to 180mmscfd from 150mmscfd. Consequently, Pemex has agreed to increase the unit price for the gas sweetening services, raising the maximum contract value to MXN1.6bn (c.MYR371.8m) from MXN1.3bn (c.MYR258.7m). We estimate the addendum contract to increase Coastal’s earnings by c.MYR5m, ie 2.7% of FY23F earnings.
- Possible contract extension. Reuter’s reported in Aug 2022 that Pemex’s excessive gas flaring brought the company a USD2m fine from Mexico’s National Hydrocarbons Commission or CNH. The company was recently fined again in Nov 2022 – it is appealing this. We believe the pressure on Pemex to curb its high emissions, coupled with the additional processing capacity, will see the Perdiz plant getting a contract extension, ie a 32- month contract set to end in 1Q24. We are also positive on the extension of Coastal’s jack-up gas compression service unit or JUGCSU contract, as Pemex only has two in operation vs the required eight units.
- Outlook. The Ixachi field is expected to Mexico’s highest-producing onshore field. Hence, Pemex will require more conditioning plants. This benefits Coastal for upcoming bids, in our view, as it has successfully completed two jobs with Mexico’s national oil company. The projects the group is tendering for includes the third Ixachi gas conditioning plant, a gas storage project, an oil processing plant, and a gas dehydration plant. We should expect some of these projects to be announced this year, given the recent completion of the Papan plant.
- We increase FY23-25F earnings by 2.7%, 4.4% and 4.4% after imputing an additional c.MYR5m pa with the assumption of a contract extension for FY25. Post the earnings revision, our TP is lifted to MYR2.76, pegged to 9x CY23F P/E, which is at its 5-year mean. This includes a 2% ESG discount for Coastal’s 2.9 score – calculated using our in-house proprietary methodology. Note: This figure is below the country mean.
- Key downside risks are contract terminations by Pemex, slower-than- expected progress billings, and higher-than-expected operating costs. a
Source: RHB Research - 5 Jan 2023
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