Review

• After excluding RM169.9mn of exceptional items, Coastal Contracts Berhad’s  (Coastal) 9MFY23 core profit of RM263.7mn (+197.7% YoY) came in above expectations at 88% of ours and consensus’ full-year forecasts. The earnings beat was mainly attributed to higher-than-expected contribution from JV as the Papan  Plant continued to recognise greater milestone claim for completion and  commenced operations. We understand that the plant has achieved first gas in  March 2023.

• To recap, Coastal still holds 100% shares in JV company Coastoil Dynamic  S.A.De C.V. (CDSA) that owns the Papan and Perdiz projects at Mexico. The  transfer of JV partner Nuvoil group’s 50% stake in CDSA is expected to  complete by 2HCY23. For now, Coastal recognises 100% of CDSA’s profits as  its JV profit. Upon completion of the share transfer, accrued JV profit will be  transferred back to Nuvoil.

• Note that the 9M comparison may not be meaningful as the group applied equity  accounting method on CDSA in 3QFY22.

• 3QFY23 revenue grew 3.5% YoY to RM55.7mn supported by higher  contribution in Gas Processing segment (+4.4% YoY due to favourable foreign  currency exchange) and Vessel Chartering unit (+1.9% YoY). On the back of i)  higher revenue, ii) greater contribution from JV (+550.2% YoY) and higher  interest income for its Gas Processing division, and iii) lower overhead expenses  for its Vessel Chartering segment, PBT more than tripled YoY to RM158.8mn.

• Sequentially, revenue for the quarter declined 10.6% QoQ driven by  unfavourable foreign exchange translation for Gas Processing segment (-6.3%  QoQ) and expiration of short-term charter contract for Vessel Chartering  division (-17.8% QoQ). Nonetheless, higher contribution from JV (+73.4%  QoQ) and lower overhead expenses for Vessel Chartering division led to a 5.2%  QoQ growth in PBT.

Impact

• We make no changes to our earnings forecasts pending the analyst briefing.

Outlook

• As the world works towards net zero emission by 2050, the demand for natural  gas that produces less air pollutants and less carbon dioxide compared with  other forms of fossil fuels is expected to grow. Hence, management is sanguine  of the prospect of the group’s Gas Processing Division.

• Management believes that the OSV market remains oversupplied despite  improving recently. While waiting for the recovery of the OSV market, the  group has embarked into liftboat chartering via acquisition of Teras Conquest 7 and has plans to tap into the wind farm renewable energy sector.

• Meanwhile, Coastal’s outstanding orderbook of c.RM5.2bn (as of 31 Dec 2022,  includes extension) would provide it with long term earnings visibility.

Valuation

• Maintain Buy on Coastal with an unchanged target price of RM3.10/share based on Sum-of-Parts (SOP) valuation

Source: TA Research - 24 May 2023