Review

• Coastal Contracts Berhad’s (Coastal) 1QFY23 core profit of RM40mn (>2x  YoY) was within our expectations and consensus’ - accounting for 28%/27% of full year forecasts respectively.

• Core net profit excludes joint venture (JV) earnings (RM93.8mn) attributable to  Coastal’s 50% JV partner (NuVoil Group) in Coastoil Dynamic S.A.De C.V.  (CDSA). To recap, CDSA owns the Papan and Perdiz projects at Mexico. The transfer of Nuvoil’s 50% stake in CDSA is targeted to complete in 2QFY23.  Upon the completion of transfer, accrued JV profits will be transferred back to Nuvoil.

• QoQ profits contracted on the back of: (1) lower fleet utilization at the Vessel  Chartering segment following expiry of a short-term charter contract for a  vessel in 4QFY22, and (2) cost drag from the Shipbuilding & Ship Repair segment.  The above more than negated the surge in interest income (+55% QoQ) derived from loans granted to CDSA.

• YoY comparison is not meaningful given that Coastal has now applied equity accounting method on CDSA starting from 4QFY22. The YoY expansion in bottomline is largely attributed to: (1) contribution from Papan’s Engineering,  Procurement, and Construction (EPC) contract (start: end-Dec 2021/3QFY22),  and (4) interest income from loans to CDSA (start: 4QFY22).

• For Papan’s EPC contract, Coastal recognized chunky milestone claims of circa  30%-40% of its total value in 1QFY23. Based on our estimates, this translates to  circa USD64mn-USD85mn (RM283mn-RM377mn). This indicates significant catch-up and progress given that the Group merely recognized 8% in 2HFY22.  On the back of this, cumulative claims recognized to-date now total circa 38%- 48%.

Impact

• Maintain earnings forecast.

Outlook & Valuation

• Coastal is optimistic of contract extensions for its assets that will boost earnings visibility until 2026-27. This is for its key assets, namely: (1) Agosto Jackup Gas  Compression Unit (JUGSU): 1st extension up to 3 years from Feb-24 to Feb-27, (2) Perdiz Onshore Gas Sweetening Plant: minimum up to 3 years from Feb24 to Feb-27, and (3) Teras Conquest 7 (TC7) Liftboat: Up to 2 years From  Sept-24 to Sept-26.

• Coastal is eagerly anticipating upcoming tenders for new gas conditioning plants  a Ixachi onshore gas field, Mexico. The latter is expected to open for bidding by end-22 or early-23. Management believes the new plant will likely be the field’s largest to-date, surpassing Papan EMC’s size of 300 mmscfd. In addition, Coastal has also submitted a bid to develop an oil processing plant for Pemex.  However, management is tight lipped on details for this new project.  Nevertheless, it was revealed that its potential award date may be as soon as  4QCY22.

• Our target price (TP) of RM2.60 is based on Sum-of-Parts (SOP) valuation. We maintain our Buy recommendation on Coastal.

Source: TA Research - 1 Dec 2022