Key takeaways from our recent meeting with Coastal Contract’s management include: (1) collection of payment for Papan’s EPC contract is expected to accelerate and amount to a chunky sum of USD196mn in 1HFY23, (2) Coastal’s current ongoing bids for Pemex projects (award dates: as early as 4QCY22) include an oil processing plant as well as a gas conditioning plant at Ixachi, (3) shareholder’s loan extended by Coastal to fund Perdiz’s construction may be settled by Oct-22 on the back of strong operating cash flows from the plant, (4) at this juncture, management’s preferred mode of funding for new upcoming projects is via debt financing and (5) management is comfortable to leverage up to net gearing of 0.5x0.6x (current: 0.2x). We reiterate our Buy recommendation on Coastal. Our target price (TP) of RM2.60 is based on Sum-of-Parts valuation.

Payments for Papan EPC Contract Picking Up. Papan onshore gas conditioning plant is expected to commission by Oct-22. The latter is also known as Papan Measurement and Control Station (Papan EMC). The targeted start date is largely on track vis-à-vis management’s initial guidance of Sept-22. As at Jun-22, overall construction for Papan has reached 83% completion (plant: 87%) since work first started in Jan-22. To recap, this plant is owned by a 50:50 Joint Venture (JV) between Coastal and Nuvoil Group. Additionally, the JV had also secured a USD220mn Engineering Procurement and Construction (EPC) contract for the plant’s primary infrastructure works. To-date, payment received by Coastal amounts to USD54mn (25% of total contract value). This signifies accelerating traction given that collection as at Jun-22 merely amounted to USD18.2mn. However, we note there is a disparity between actual progress of 74% (as at Jun22) and collection of billings (to-date: 25%). As such, management expects momentum to pick-up in the next 3 quarters, particularly in 1HFY23 (Figure 1). The latter is expected to amount to a lumpy USD196mn over 2 quarters.

Source: TA Research - 4 Oct 2022