• Downgrade to NEUTRAL from Buy, new MYR2.51 TP from MYR2.56, 7% upside. Coastal Contracts’ 9MFY23 (Jun) results are within expectations. Although the group is set to achieve another record-breaking year, our outlook remains cautious, premised on the delayed tenders and murky timeline of project awards. We believe the optimism over its near-term growth has been factored in.

• 9MFY23 results within expectations. On the basis of a completed JV share transfer, Coastal’s recorded core profit of MYR248.5m accounts for 83% of our and Street full-year forecasts. This is in line, as we expect lower revenue recognition from the EMC Papan plant in the fourth quarter.

• Results review. 9MFY23 core earnings more than doubled YoY to MYR248.5m, from higher interest income earned from loans granted to a JV, and a higher JV share of profit. 3QFY23 revenue decreased by 10.6% QoQ to MYR55.7m, mainly driven by lower revenue from the vessel chartering segment as a short-term charter contract expired during the quarter. However, 3QFY23 core profit surged by 39% QoQ to MYR98.9m from MYR71.2m, attributed to the higher recognition of the EMC Papan plant. Coastal has yet to complete its 50% equity interest share transfer in Coastoil Dynamic SA De CV – a JV with Grupo Empresarial Alfair SAPI De CV. Hence, we expect to see a cumulative one-off loss on the disposal of its effective interest in the JV (MYR206.7m as of 9MFY23) in 4QFY23.

• Outlook. As of 3QFY23, c.80% of the USD220m EPC payment has been billed, and the group expects to receive the rest in 4QFY23 and 1QFY24. While it is eyeing a few projects (eg gas dehydration plant, Ixachi separation plant, Ixachi gas conditioning plant), management guided that the only bidding that is out is for the separation plant. In the meantime, the tender for the third Ixachi gas conditioning plant has been delayed, as Pemex is focusing on drilling more wells.

• Cut to NEUTRAL. We make no changes to our earnings forecasts, and maintain our 9x FY24F P/E valuation (at its 5-year mean). Our downgrade is premised on the slower-than-expected project rollout and the fact that we believe the optimism of its strong earnings growth for the year has been largely priced in. However, there is a potential upside from Coastal securing more contracts. Our TP also drops to MYR2.51 from MYR2.56 due to the ascribed 4% discount, as its ESG score falls to 2.8 from 2.9.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 24 May 2023