Review

• Excluding RM55.7mn extraordinary items such as gain on disposal of vessels and gain on acquisition, Coastal Contracts Berhad’s (COASTAL) 1QFY24 core profit of RM39.2mn accounted for 41% of ours and 43% of consensus’ full-year forecasts respectively. We deem the results to be within expectations as we expect weaker performance in coming quarters due to lower profit from Papan Plant EPCC as the project is at the tail end of construction and the expiry of Teras Conquest 7 (TC7) liftboat contract in September 2024.

• QoQ: COASTAL registered a PBT of RM98.8mn in 1QFY24 (Jan-Mar 2024) compared with a LBT of RM135.6mn in 6QFP23 (Oct-Dec 2023) due to greater contribution from all 4 segments. The hospitality segment was formed following the completion of acquisition on 14 March 2024 and registered a PBT of RM7.2mn despite having no revenue, driven by gain on bargain purchase. The gas segment turned from LBT to PBT on the back of (i) greater contribution from JV (+73.3% QoQ) which we attribute to greater EPCC profit and greater gas volume processed; (ii) higher interest income from loan to JV; and (iii) absence of RM177.0mn impairment loss on receivables for JUGCSU in the preceding quarter. Vessel Chartering segment’s PBT more than double QoQ from gain on disposal of OSV while Shipbuilding segment’s LBT narrowed supported by lower overhead costs.

• YoY: The PBT plunged 37.8% YoY from 3QFP23 (Jan-Mar 2023) mainly due to lower contribution from JV (-80.8% YoY) from lower EPCC profit.

Impact

• No change to earnings forecasts. We have yet to include the hospitality segment into our earnings forecast due to lack of granularity on the timeline.

Outlook

• Agosto JUGCSU was suspended since 27 Nov 2023, earlier than its contract expiry in February 2024. 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 for 7-10 years. This is a good sign as it suggests high likelihood of successful contract extension, providing upside to our earnings forecasts.

• COASTAL’s TC7 contract expires in September 2024 while Perdiz plant’s gas sweetening contract expires in December 2025. The group’s main earning contributor beyond 2025 is only Papan plant. Fortunately, the extension of Perdiz Plant’s contract is likely given that Pemex is negotiating to add LPG processing capability for a 5-year contract extension. Nonetheless, COASTAL needs to increase its source of income to replace some of the expiring contracts.

• The hospitality segment is unlikely a major contributor in the short term, and we expect losses in the early stages before occupancy rate increases. Overall, we expect weaker results QoQ in 2QFY24 due to lower EPCC profit.

Valuation

• We include the hospitality segment into our SOP valuation and raise our TP to RM1.74/share (previously RM1.62/share). Maintain Hold. COASTAL currently trades at 7.9x FY25 EPS and 0.5x P/B value but there is a concern about the sustainability of earnings as some of its contracts gradually expire.

Source: TA Research - 27 May 2024