Review

• After excluding exceptional items including gain on disposal of vessels (RM127.3mn), loss on disposal of joint venture (JV) company (RM155.3mn) and provision for delay penalty in achieving critical construction milestone in JV company (RM92.4mn), Coastal Contracts Berhad’s (COASTAL) FY23 core profit of RM310.4mn (+114.0% YoY) came in within expectations.

• YoY/QoQ: The group registered LBT of RM36.2mn in 4QFY23 compared with PBT of RM115.6mn and RM158.8mn in 4QFY22 and 3QFY23 respectively due to loss on disposal of JV (where accrued JV profit is transferred back to JV partner Nuvoil) and provision in delay penalty mentioned above leading to unexpected share of loss in JV of RM66.6mn. This is despite the group more than tripling its PBT for Vessel Chartering division YoY.

• Full year comparison is not meaningful given that COASTAL recently applied equity accounting method on JV company starting from 3QFY22.

Impact

• After adding in FY23 numbers and carrying out some housekeeping activities, we adjust our FY24/FY25 earnings forecasts by -0.2%/5.1% respectively.

Outlook

• COASTAL’s sizeable order book as of 31 March 2023 stands at RM4.3bn, with a potential addition of RM666.9mn from contract extensions. Out of the secured order book, 91.1% comes from Papan plant, which includes operation and maintenance for 10 years until August 2032. The strong order book provides earnings visibility for COASTAL.

• Meanwhile, the group is also the leading contender for Pemex’s Large Gas Conditioning Plant. COASTAL is currently targeting 4 gas-related projects in Mexico via the group’s 50%-owned JV company. Considering the group’s track record in Papan and Perdiz gas conditioning plants, we believe the group is the leading contender for these long-term contracts.

• Overall, we expect earnings to decrease YoY in FY24 due to lower EPCC profit from JV company compared with FY23.

Valuation

• We roll forward our base year to FY24 and lower our TP to RM2.37/share (previous: RM3.10/share) based on sum-of-parts valuation. Downgrade to Hold.

Source: TA Research - 1 Sept 2023