Key takeaways from COASTAL’s analyst briefing: (i) JUGCSU was given 2 options for contract extension; (ii) Maximum processing capacity expected for Perdiz and Papan Plant in 2QFY24; (iii) Resort project to be the first luxurious resort in the region. We make some housekeeping adjustments to our earnings forecasts, adjusting our FY24-FY26 forecasts by -2.7% to +0.8%. Maintain Hold with a lower TP of RM1.62/share based on SOP valuation.

Positive Negotiation Update for JUGCSU

Recall that Coastal Contracts Berhad’s (COASTAL) jack-up gas compression service unit (JUGCSU) was suspended while the discussion for contract extension is ongoing. COASTAL updated that Pemex has given the group 2 options: (i) to continue operating at the existing Canterall Field for 2 years or (ii) to operate at another field in the Gulf of Mexico for 7-10 years. For the latter option, modification to JUGCSU is required as the water is deeper than at the current field. We view the update positively as this increases the likelihood of successful contract extension.

In 6QFP23, COASTAL has recognised RM185.9mn of impairment loss on receivables for JUGCSU, leaving net balance of RM148.7mn receivables from JUGCSU’s charterer. Management expects no payment for JUGCSU in 1QFY24 and payment of c.USD40mn (c.RM189.3mn) in 2QFY24, leading to a one-off reversal of impairment loss on receivables of c.RM40.6mn in 2QFY24.

Maximum Processing Capacity Expected in 2QFY24

Management disclosed that Pemex has been increasing the gas processing volume at Perdiz Plant and Papan Plant. In 1QFY24 quarter-to-date, Perdiz Plant is processing around 150mn scfd of natural gas (6QFP23: 127mn scfd), while Papan Plant is at 330mn scfd (6QFP23: 214mn scfd). Both plants are expected to operate at full capacity in 2QFY24.

Meanwhile, COASTAL has recognised reversal of provision for Papan Plant’s construction delay penalty amounting to c.USD11mn (out of USD21mn or c.RM85mn provision) in 6QFP23.

Resort Project to be the First Luxurious Resort in the Region

Recap that COASTAL has entered into agreements to (i) acquire 100k shares in Jewel of Mabul Development Sdn Bhd (JOMD) for RM19.0mn cash, and to (ii) subscribe another 1.7mn ordinary shares in JOMD for RM16.0mn cash. Post acquisition, JOMD will be an indirect 82%-owned subsidiary of COASTAL.

JOMD owns a 31.2-hectare land in Pulau Mabul, Sabah. JOMD is undertaking the development of an overwater bungalow resort on the land, which is divided into phase 1 (18 acres) and phase 2 (59 acres). Piling works for Phase 1 has been completed. The estimated construction period is 1-2 years. COASTAL 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.

The targets for the resort are top-tier clienteles and it will be the first luxurious resort in the region. COASTAL believes that its partner (has remaining 18% stake in JOMD) will lower the execution risk due to the track record of more than 30 years of experience in the tourism industry and being a former member of Sabah Tourism Board. The group will allocate up to RM50mn for the phase 1 of development. No further financial guidance was given as the exact plans are not firm yet. We expect immaterial losses to the group in FY24-FY25 during development of the resort. Note that for the financial year ended March 2023, JOMD made a net loss of RM487k. From FY26 onwards when the resort is expected to commence operations, we expect more losses in the initial phase from marketing expenditure to attract tourists but expect profitability to improve once occupancy rate increases.

Impact

We make some housekeeping adjustments to our earnings forecasts, adjusting our FY24-FY26 forecasts by -2.7% to +0.8%. We will include the tourism venture into our forecasts once we have a clearer picture on the resort project.

Valuation

We roll forward our valuation base year. Maintain Hold with a lower TP of RM1.62/share (previous: RM1.76/share) based on SOP valuation. COASTAL currently trades at 8.3x FY24 EPS and 0.4x P/B value but there is concern about the sustainability of earnings as some of its contracts gradually expire (Figure 2).

Source: TA Research - 21 Mar 2024