Coastal Contracts - Surprise Impairment on Receivables; Keep SELL

Date: 
2024-03-01
Firm: 
RHB-OSK
Stock: 
Price Target: 
1.25
Price Call: 
SELL
Last Price: 
1.46
Upside/Downside: 
-0.21 (14.38%)
  • Keep SELL and MYR1.25 TP, 25% downside. Coastal Contracts recorded core earnings of MYR323.2m for 18MFY23, which met our expectations. The group recorded a weaker performance for the quarter, due to unresolved negotiations on the extension of the jack-up gas compression unit (JUGCSU) contract. Investors should be cautious in their outlook for the stock, given the uncertainty over the firm’s earnings growth.
  • Within expectations. At 101% of full-year estimates, COCO’s recorded 18MFY23 core earnings of MYR323.2m met expectations. Note: There is a wide disparity in the consensus estimate due to the FYE change – the company’s FYE is now December from June – which distorts the comparison.
  • COCO recorded a core profit of MYR48.8m (-32.1% QoQ, -31.5% YoY) after stripping out one-off items including the unexpected MYR176.9m impairment loss on receivables, MYR12.6m gain on disposal of vessels, MYR24m FX loss, etc. The weaker QoQ performance was mainly driven by the lower income contribution from the JUGCSU, given the temporary suspension of the bareboat charter hire, coupled with the underperformance of its shipbuilding and ship repair division.
  • Outlook. The sizeable impairment on JUGCSU caught us by surprise, and management explained that it was due to the slower-than-expected collection from the end-user, Petroleos Mexicanos (Pemex) which resulted in a higher-than-expected credit loss that needs to be provided in accordance with MFRS 9 financial instruments. At this juncture, COCO does not expect a further impairment loss on receivables as the group already took a conservative approach in calculating the expected credit loss in the quarter. It is important to clarify that this does not impact its collection of payments for its other projects, ie Papan and Perdiz – given that COCO does not have a direct contractual relationship only for the JUGCSU. In terms of future prospects, the group is still targeting gas infrastructure projects at the Ixachi field. However, timeline of the award is still unknown as Pemex is currently focusing on increasing its gas production on the said field.
  • Keep SELL. We maintain our earnings forecast and introduce FY26F earnings, with the assumption of a contract extension for the JUGCSU and Perdiz plant. Our TP stays at MYR1.25, based on an unchanged 8x FY24F P/E (below its 5-year mean) on the back of slower-than-expected project rollouts and contract extensions. Our TP includes a 6% ESG discount built in, based on the group’s 2.7 ESG score vs the 3.0 country median.
  • Key upside risks include more job wins, faster-than-expected contract extensions, and lower-than estimated operating costs. The opposite represents the downside risks.

Source: RHB Research - 1 Mar 2024

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