Review

• Coastal Contracts Berhad’s (Coastal) 1HFY23 core profit of RM165mn (>3x  YTD) exceeded our expectations and consensus’ - accounting for 73%/77% of full year forecasts respectively. The variance was largely due to unexpected turnaround in the Shipbuilding and Repair segment. This was mainly attributed to compensation from a supplier for a ship repair contract due to non-conformities of a vessel's parts and equipment.

• Core net profit excludes joint venture (JV) earnings (RM92.3mn) 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 is now delayed to 2HFY23 (previous target: 2QFY23). Upon completion of the transfer, accrued JV profits will be transferred back to Nuvoil.

• QoQ profit expansion (+9%) was largely driven by the Shipbuilding and Repair segment as described above. To a lesser extent, the bottomline expansion was also boosted by turnaround at the Vessel Chartering segment. This was on the back of: (1) improved fleet utilisation for offshore support vessels (OSV), and  (2) higher charter rates for Teras Conquest liftboat. The above more than offset sequentially lower JV profits from CDSA. This was due to lower recognition of profits from Papan plant’s Engineering, Procurement, and Construction (EPC)  contract.

• YoY comparison is not meaningful given that Coastal recently applied equity accounting method on CDSA starting from 4QFY22. The YoY expansion in bottomline is largely attributed to: (1) contribution from Papan’s EPC contract  (start: end-Dec 2021/3QFY22), and (2) interest income from JV loans to CDSA  (start: 4QFY22).

Impact

• For FY23, we increase our OSV fleet utilization by 15% to approximate actual run rate in 1HFY23. In addition, we raise ship repair margins to account for the supplier’s compensation in 2QFY23. Following this, our FY23 forecast is raised by 34%.

Outlook & Valuation

• Coastal’s outstanding orderbook of RM5.1bn would provide long term earnings visibility. 70% comprises recurring annual income from a 10-year O&M contract for Papan Gas plant. In addition, Coastal is also optimistic to secure potential contract extensions of up to RM702mn for its liftboat and jack-up gas compression unit.

• Coastal currently trades at 6.7x forward P/E - below its historical mean of 10.8x.  This is in spite of enhanced earnings visibility and growth prospects. Recall that key projects that result in earnings re-rating, namely Perdiz and Papan, were awarded in Feb-21 and Dec-21 respectively. Prior to that, Coastal’s earnings base was significantly lower and volatile. This was due to its cyclical and competitive legacy businesses (Shipbuilding & Repair and Vessels Chartering).

• Following the upgrade in our earnings forecast, our target price (TP) for Coastal is raised to RM3.10 (previous: RM3.06). Our TP is based on Sum-of-Parts (SOP) valuation. Maintain Buy.

Source: TA Research - 1 Mar 2023