COASTAL has ventured into tourism via the acquisition of 82% stake in JOMD for RM19.0mn. JOMD owns a 31.2-hectare land in Pulau Mabul, a famous dive site near Pulau Sipadan. We are mildly negative on the acquisition due to COASTAL’s lack of experience in the sector and the associated execution risk. No change to earnings forecasts pending granularity from analyst briefing. After including a conglomerate discount of 5%, we lower our TP to RM1.76/share based on SOP valuation. Maintain Hold.

Acquisition of 82% Interest in Owner of a 31.2-hectare Land at Pulau Mabul

Coastal Contracts Berhad’s (COASTAL) wholly-owned unit Coastal Hospitality Holdings Sdn Bhd (CHH) has entered into agreements to acquire 100k shares in Jewel of Mabul Development Sdn Bhd (JOMD) from Richard Christopher Barnes and to subscribe another 1.7mn ordinary shares in JOMD for a total cash consideration of RM19.0mn. Post acquisition, JOMD will be an indirect 82%-owned subsidiary of COASTAL. The remaining 18% stake is held by KK Soho House Sdn Bhd, equally owned by seller Richard and existing director of JOMD Lo Ming Leong.

JOMD owns a 31.2-hectare land in Pulau Mabul, Sabah. Pulau Mabul is a famous dive site located 45 minutes of boat ride away from Pulau Sipadan. The island is one of the islands near Sipadan where visitors can stay at, considering that there is no resort on Sipadan. Based on our check with frequent divers, there are many tourists in Pulau Mabul, especially Chinese tourists after the reopening of the international borders.

JOMD is undertaking the development of an overwater bungalow resort on the land, which is divided into phase 1 and phase 2. For the financial year ended March 2023, JOMD made a net loss of RM487k, while net assets stood at RM4.6mn and net book value of land and property development expenditure was RM18.1mn. As part of the agreement, CHH will inject an additional RM50mn into JOMD via share subscription to complete phase 1 of resort project, financed through internally generated funds and/or bank borrowings where the proportion has not been determined.

Our Take

COASTAL’s intention to diversify into the hospitality and tourism was hinted when the group, through a bourse filing on 17 Jan 2024, announced the incorporation of a subsidiary known as Coastal Hospitality Holdings Sdn Bhd.

Overall, we are mildly negative on the acquisition. We applaud COASTAL’s effort to expand its source of earnings to replace some of the expiring contracts. Nonetheless, we are cautious on the move due to COASTAL’s lack of experience in the sector and the associated execution risk.

Impact

Management plans to provide more details on the expected construction timeline and capacity of Phase 1 of the resort development during analyst briefing on 20 March 2024. No change to earnings forecasts pending granularity from the briefing.

Valuation

Following COASTAL’s decision to diversify into tourism, we assign a conglomerate discount of 5% to our valuation. Maintain Hold with a lower TP of RM1.76/share (previous: RM1.85/share) based on SOP valuation. COASTAL currently trades at 9.0x FY24 EPS but there is a concern about the sustainability of earnings as some of its contracts would gradually expire without replacement.

Source: TA Research - 15 Mar 2024