RHB Investment Research Reports

Coastal Contracts - Resilient Gas Earnings

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Publish date: Mon, 02 Sep 2024, 11:10 AM
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  • Keep NEUTRAL, new MYR1.89 TP from MYR1.64, 8% upside. 1H24 results exceeded expectations – driven by strong gas processing contributions amidst the jack-up gas compression service unit’s (JUGCSU) suspension. However, we maintain our cautious view, given uncertainties surrounding the new tourism venture and ongoing delays for new gas infrastructure projects.
  • Beat expectations. Coastal Contract’s 1H24 core earnings of MYR79.8m exceeded expectations at 58% and 56% of our and Street’s forecasts. The strong performance was primarily due to increased gas processing volumes. The group posted a core profit of MYR39.2m for 2Q24 after stripping out an unrealised FX loss of c.MYR33m. The slight 3.5% QoQ decline was mainly attributed to higher operating costs, as maintenance work for its plants, originally scheduled for 1Q, was deferred to 2Q.
  • Outlook. We expect COCO’s recurring income to remain stable, supported by increased gas production volumes at its Perdiz and Papan plants. This is despite the temporary income loss from the JUGCSU, as contract extension negotiations are ongoing. Management indicated that Pemex aims to conclude these negotiations by end 2024. To recap, the group has been presented with two options: i) Convert the JUGCSU into a mobile offshore production unit or MOPU to operate at the current field for an additional five years or ii) relocate the JUGCSU to another field for a 5- to 10-year period, which would necessitate extending its legs due to the new field being 20m deeper. Management guided that Pemex is reportedly inclined towards the first option. However, tenders for similar plants at Ixachi may still face delays due to the ongoing focus on drilling more wells.
  • We have revised our FY24F-26F earnings upwards by 16.1%, 15.6%, and 15.4%, reflecting the increased contributions from the JV profit share due to higher gas processing volumes. We arrive at a new TP of MYR1.89, which is pegged to an unchanged 6x FY25F P/E (-1.5SD from its mean). While the potential JUGCSU contract extension and strong recurring income from the two gas plants are positive factors, uncertainties related to the new tourism venture and delays in gas infrastructure projects continue to justify a more cautious valuation. Our TP also includes a 6% discount based on COCO’s 2.7 ESG score vs the 3.0 country median.
  • Key downside risks include contract termination, lower-than-expected progress billings, and higher-than-expected costs. The converse represents the upside risks.

Source: RHB Research - 2 Sep 2024

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