Review

• Coastal Contracts Berhad’s (Coastal) FY22 core profit of RM136mn (>2x YTD) was above our expectations and consensus forecast, accounting for 127%/118% of full-year forecasts respectively.

• Core net profit excludes joint venture (JV) earnings (RM35.81mn) attributable to Coastal’s 50% JV partner (NuVoil Group) in Coastoil Dynamic S.A.De C.V. (CDSA). To recap, CDSA owns the Papan and Perdiz projects at Mexico. The transfer of Nuvoil’s 50% stake in CDSA has now been delayed to 2QFY23 (previous: 2QCY22). However, upon the completion of transfer, accrued JV profits will be transferred back to Nuvoil.

• The outperformance versus our forecasts was largely driven by unexpected interest income earned from loans granted to CDSA. We estimate that this yielded additional income exceeding RM19mn in 4QFY22. We understand that a large chunk of the loans are utilized to finance Papan’s construction, with the balance accruing to Papan.

• QoQ and YoY comparisons are not meaningful given that Coastal has now applied equity accounting method on CDSA starting from 4QFY22. Nevertheless, given that Coastal currently owns 100% of CDSA, it will fully recognize CDSA’s profits in the interim period.

• Other chunky exceptional items excluded from core net profit include, amongst others, share-based payment expense on ESOS (RM11.2mn), reversal on impairment loss on PPE (RM6.9mn), and net FX gain (RM16.4mn).

• YTD profit strength was mainly anchored by maiden contribution from Perdiz’s O&M contract (start: Jul-21). Additionally, the bottom-line received a boost from: (1) higher contribution from Teras Conquest liftboat, (2) pretax losses more than halved at the Shipbuilding & Repair segment, (3) contribution from Papan’s Engineering, Procurement, and Construction (EPC) contract (start: end-Dec 2021), and (4) interest income from loans to CDSA (as highlighted above).

• For Papan’s EPC contract, we understand from management that Coastal has recognized milestone claims amounting to circa 8% (3QFY22: 3%) of its total value. We estimate this translates to circa USD17.6mn/RM79mn.

Impact

• We tweak our FY23-24 forecasts to reflect the change in accounting method on CDSA. Additionally, we raise interest income by an average of RM60mn p.a to reflect contribution from JV loans to CDSA. As a result, our FY23-24 forecast is raised by 14%-27%.

Source: TA Research - 1 Sept 2022