Review

• Coastal Contracts Berhad’s (COASTAL) 18MFY23 core profit of RM422.3mn came in within ours but above consensus expectations, accounting for 98% of ours and 141% of consensus’ full-year forecasts respectively.

• QoQ: COASTAL registered LBT of RM135.6mn in 6QFY23 compared with PBT of RM87.9mn in 5QFY23 due to suspension of bareboat charter for jack-up gas compression service unit (JUGCSU) from 27 Nov 2023 onwards, as well as impairment loss on receivables (RM176.9mn) from charterers of JUSCSU due to slower than expected collection from end user Petroleos Mexicanos (Pemex). Stripping off exceptional items such as impairment loss mentioned above and gain on disposal of vessel (RM12.6mn), core profit was still down 33.2% QoQ mainly driven by lower contribution from JUGCSU.

• YoY: Excluding exceptional items, core profit of RM47.8mn plunged 44.5% YoY compared with 2QFY23. The poorer performance was due to lower contribution from Mexican joint venture company from lower recognition of Papan plant’s construction profit as the plant is near the tail end of construction, as well as lower contribution from JUGCSU.

• YTD comparison is not possible as the group recently changed its financial year end from June to December.

Impact

• We incorporate FY23 numbers and carry out some housekeeping adjustments to our model. Following these changes, we adjust FY24/FY25 earnings forecasts by 5.9%/-3.4% respectively. We also introduce FY26 earnings forecasts of RM58.1mn.

Outlook

• Agosto JUGCSU was suspended since 27 Nov 2023, earlier than its contract expiry in February 2024. The latest quarter’s impairment loss on receivables for JUGCSU due to slow collection from Pemex is concerning as this may suggest Pemex is not keen on extending the contract. Management expects outcome of negotiation by June 2024.

• COASTAL’s Teras Conquest 7 Liftboat contract will expire in September 2024 while Perdiz plant’s gas sweetening contract will expire in December 2025. The group’s main earning contributor beyond 2025 is only Papan plant if the other contracts are not extended. Fortunately, the extension of Perdiz Plant’s contract is likely given that Pemex is negotiating to add LPG processing capability to the plant for a 5-year extension to the contract. Nonetheless, we believe COASTAL urgently needs to increase its source of income to replace some of the expiring contracts.

Valuation

• After factoring in the changes in our earnings forecasts, we lower our TP to RM1.85/share (previously RM1.90/share) based on SOP valuation. Downgrade to Hold in view of the lower upside potential.

Source: TA Research - 1 Mar 2024