RHB Investment Research Reports

Coastal Contracts - Perdiz Plant Contract Extension; Keep SELL

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Publish date: Tue, 06 Feb 2024, 03:11 PM
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  • Keep SELL and MYR1.25 TP, 26% downside. Yesterday’s announcement on the extended Perdiz plant contract brings a positive note to Coastal Contracts, providing visibility for its recurring income. However, we are still exercising caution over its jack-up gas compression unit (JUGCSU) contract, which is still undergoing negotiations. Pemex’s objective to increase production output may also cloud the group’s future job wins.
  • Perdiz plant contract extension. Coastoil Dynamic, the group’s JV with Nuvoil, secured a contract extension of up to 31 Dec 2025 for its sweetening plant. The extended contract has a tenure of two years with a value of MXN1.1bn or MYR318.9m. The slightly higher contract value is due to the weakening of the MYR, but this translates minimally to Coastal’s earnings. Given that we anticipated this contract extension, we make no changes to our forecasts as the numbers are already imputed. The plant contributes c.34- 38% to Coastal’s FY24-FY25 net earnings.
  • Without by-product recovery features. Coastal previously shared that it was negotiating for an expansion of the Perdiz plant to add by-product recovery features, which are similar to the Papan plant. This round of extension has not been included in the expansion yet, which provides further upside possibilities to the maximum contract value. Note: This depends on Pemex‘s production plans. At the moment, the latter is focusing on increasing its gas production output. This has caused delays for the tendering of other gas processing plants – this might also prolong the Perdiz plant’s expansion plans.
  • Still no news on JUGCSU. Meanwhile the contract extension for JUGCSU, which expired in Nov 2023, is still being discussed. Production is currently halted during this negotiation process, which may take about 3-6 months to conclude. Hence we remain cautious on the stock, as JUGCSU contributes a substantial portion to Coastal’s recurring income (c.MYR41m). We have previously cut our earnings on the assumption of a full 6-month negotiating period and 50% discounted contract rate.
  • Maintain SELL. Our TP is kept at MYR1.25 based on an unchanged 8x FY24F P/E (below its 5-year mean) on the back of slower-than-expected project rollouts and contract extensions. Our TP also includes a 6% ESG discount based on the group’s 2.7 score vis-à-vis the 3.0 country median.
  • Key upside risks include more job wins, faster-than-expected contract extensions, and lower-than estimated operating costs.

Source: RHB Research - 6 Feb 2024

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