• Keep NEUTRAL, with new MYR2.15 TP from MYR2.51, 1% downside. Coastal Contracts achieved a record-breaking year and is set to see recurring income from its gas plants in the coming years. However, FY23 (Jun) results still came below expectations, due to share of JV loss from the delay of its EMC Papan Plant. We maintain our cautious view as we await more project announcements.

• FY23 core profit of MYR202m came in below ours and Street’s expectations, making up only 68% of earnings, with the main deviation coming from its share of JV loss.

• Results review. Coastal recorded a core net loss of MYR45.9m (vs 3QFY23 core profit of MYR98.9m) on the back of a MYR66.6m JV share of loss. The group undertook a cost provision of USD21m (c.MYR98m) for the EPCC delays of the EMC Papan Plant. We do not expect it to incur more losses in the future, and management has submitted a request to exempt the delay penalty – with the reasoning that it was caused by a force majeure event (extreme weather). During the quarter, the group completed its 50% equity interest share transfer in Coastoil Dynamic – a JV with Mexico’s Grupo Empresarial Alfair SAPI. Hence, we see a one-off MYR155.3m disposal loss of effective interest in the JV.

• Delays in project timeline. Currently, Mexico’s state-owned Petroleos Mexicanos (Pemex) is concentrating on increasing gas production on the Ixachi field. Hence, Coastal’s management said that projects such as the gas dehydration plant, Ixachi separation plant, and Ixachi gas conditioning plant, are put on hold. Furthermore, Coastal is still in discussions for its contracts extension for the jack-up gas compression service unit (JUGCSU) and Perdiz plant, which is set to expire in 1QCY24. However, management guided it could be given temporary extensions – on a monthly basis.

• Vessel chartering business. The group disposed two of its OSVs in 4QFY23 – with just three remaining currently. This is in line with its strategy to focus on production-related infrastructure. Moving forward, Coastal is looking to dispose the rest of the OSVs.

• Maintain NEUTRAL. We trim our FY24-25 earnings forecast by 3.4-5.7% on account of lower marine contribution after the disposal of vessels. We also introduce FY26 forecast with the assumption of a contract extension for the JUGCSU and Perdiz plant. Our new MYR2.15 TP (from MYR2.51) is obtained by ascribing a lower 8x FY24F P/E valuation (slightly below its 5-year mean) on the back of slower-than-expected project rollout. However, we see potential upside from Coastal securing more contracts. Our TP also includes a 4% ESG discount based on its 2.8 score. Key downside risks include contract termination, lower-than-expected progress billings, and higher-than-expected costs. The converse represents the upside risks.

Source: RHB Securities Research - 1 Sept 2023