Key takeaways from Coastal Contracts Berhad’s (COASTAL) analyst briefing: (i) The group is liable to up to USD30.4mn due to delay penalty; (ii) Ixachi field is expected to expand capacity by 1HCY24; (iii) Management is confident of Perdiz Plant’s contract extension. We raise our FY24-FY26 earnings forecasts by 13.6%- 20.0% after raising our tariff for Papan Plant in line with revenue breakdown for Papan Plant given by management. Upgrade to Buy with a higher TP of RM2.47/share (previous RM2.37/share) based on sum-of-parts valuation.

Liable up to USD30.4mn due to Delay Penalty

Recall that Coastal Contracts Berhad (COASTAL) registered a net loss of RM49.6mn in 4QFY23 (4QFY22: net profit of RM104.4mn). The net loss is mainly attributed to: (i) loss on disposal of JV where accrued JV profit is transferred back to JV partner Nuvoil (RM155.3mn); (ii) provision for delay penalty in achieving critical construction milestone for Papan Plant (c.USD21mn or c.RM85mn) and (iii) absence of EPC profits due to extra cost incurred for some rectification works. We understand that the delay in achieving construction milestone is mainly due to the harsh weather condition. The group is applying for permissible delay considering that the delay is from a force majeure event. If application is not successful, COASTAL is liable up to USD30.4mn. Fortunately, no further delay penalty expected as the group has achieved all the critical construction milestones for Papan project.

Ixachi Field Expected to Expand Capacity by 1HCY24

Limited by Ixachi field’s gas production capacity, the gas from Perdiz Plant continues to be diverted to Papan Plant due to Papan Plant’s ability to process additional products such as naphtha and LPG. Perdiz Plant’s daily processing volume was 122.8mmscfd in 4QFY23 (3QFY23: 165.2mmscfd), lower than its 180mmscfd capacity. Meanwhile, Papan Plant’s daily processing volume was 187.4mmscfd (3QFY23: 174.8mmscfd), lower than its 300mmscfd capacity. Both plants are expected to ramp up processing capacity once Pemex drills new wells and increases the production capacity of Ixachi field, expected by 1HFY24.

Confident of Perdiz Plant’s Contract Extension

Management is confident of obtaining Perdiz Plant’s contract extension. The group is currently finalising the terms with Pemex, with indicative extension duration of 2- 3 years. The reason for the lengthy discussion in obtaining extension is because of a term in the contract entitling COASTAL to an inflation adjustment amounting to c.USD500k per month as Mexican Peso has strengthened c.20% against USD over the years. Note that Perdiz contract is denominated in Mexican Pesos.

Impact

We raise our FY24-FY26 earnings forecasts by 13.6%-20.0% after raising our tariff for Papan plant in line with the revenue breakdown for Papan plant given by management.

Valuation

Upgrade to Buy with a higher TP of RM2.47/share (previous RM2.37/share) based on sum-of-parts valuation.

Source: TA Research - 12 Sept 2023