Review

• Coastal Contracts Berhad’s (Coastal) 9MFY22 core profit of RM71mn (>2x YTD) was below our expectations and consensus’ - accounting for 65%/67% of full-year forecasts respectively. The variance versus our forecasts was largely attributed to lower-than-expected recognition of profits from Papan project’s Engineering, Procurement, and Construction (EPC) contract. We understand from management that Coastal has recognized milestone claims amounting to circa 3% of total contract value (circa USD8.4mn/RM37mn). Nevertheless, the plant and EPC contract (start: end-Dec 2021) is on track for completion by end-Aug 2022.

• Core net profit excludes 50% joint venture (JV) earnings (RM17.4mn) attributable to Coastal’s 50% JV partner (NuVoil Group) in Coastoil Dynamic S.A.De C.V. (CDSA). To recap, CDSA (currently 100% owned by Coastal) owns the Papan and Perdiz projects at Mexico. The transfer of Nuvoil’s 50% stake in CDSA is expected to complete by 2Q22. Therefore, in the interim period, Coastal will fully consolidate CDSA’s profits. Nevertheless, upon completion of the transfer, accrued JV profits will be transferred back to Nuvoil.

• YTD profits more than doubled mainly due to maiden contributions from Perdiz gas plant’s O&M contract (start: Jul-21). Additionally, to a lesser extent, profits were uplifted by: (1) higher contribution from Teras Conquest liftboat, (2) narrowed pretax losses at the Vessel Chartering segment, and (3) commencement of Papan’s EPC contract in end-Dec 2021.

• QoQ bottomline expansion of 7% was attributed to: (1) Papan’s EPC contract (as detailed above) and (2) turnaround at the Vessel Chartering segment.

Impact

• We tweak our assumptions for Papan’s EPC contract recognition to 30%/70% in FY22/23 (previous: 40%/60%) to account for actual 9MFY22 run rate. As a result, our FY22/23 forecasts are revised by -7%/7%.

Outlook

• According to management, Pemex requires eight Jack-Up Gas Compression Service Unit (JUGCSU) over the next 20 years. However, there are only 2 working units currently, including Agosto 12 and a Spanish-owned unit. On the back of this, Coastal is hopeful to secure more JUGCSU contracts. Additionally, management is confident that ongoing negotiations for Agosto’s contract extension will be successful.

• Ixachi’s gas production is expected to ramp up rapidly to reach a peak of 1,100 mmscfd in 2026. As such, Pemex, requires 3 new gas plants to process the field’s output over the ensuing 25 years. We believe that Coastal is a front runner for these projects, given its robust balance sheet and proven track record with Papan and Perdiz.

Valuation

• Following the revision in our forecasts above, the target price (TP) for Coastal is reduced to RM2.00 (previous: RM2.06). Our TP is based on Sum-of-Parts (SOP) valuation. Our TP implies attractive CY22/23 forward P/E of 10x. We maintain Buy recommendation on Coastal.

Source: TA Research - 27 May 2022