Key takeaways from COASTAL’s analyst briefing: (i) Reaching Nearly RM1bn Cash Position; Large CAPEX Plans and Inventory Build-Up Ahead; (ii) Papan and Perdiz Plant Operating at Peak Capacity; (iii) Potential Conversion of JUGCSU into MOPU. We have raised our FY25 and FY26 earnings forecasts by 19.8% and 41.7%, respectively, reflecting potential contributions from new revenue streams, including the vessel-building program. Upgrade Hold to Buy with a TP of RM2.04/share (previously: RM1.63/share), based on sum-of-parts (SOP) valuation. COASTAL is expected to secure contract extensions for JUGCSU and capacity expansion contract for Papan Plant, providing additional recurring income to the group.

Reaching Nearly RM1bn Cash Position; Large CAPEX Plans and Inventory Build-Up Ahead

COASTAL is leveraging its cash position (3QFY24: RM221.0mn), expected to surge to nearly RM1bn following the repayment of USD155mn from its Mexican JV this week and an additional USD10mn in 1Q25, to pursue significant growth initiatives. The group is targeting two medium-sized production-related infrastructure projects (e.g., FPSOs or MOPUs) in Southeast Asia and three renewable energy projects, including wind and solar farms, through partnerships with experienced industry players who will hold majority stakes to mitigate risks. In addition, COASTAL plans to invest up to RM100mn in a new resort, up to RM200mn in a vessel-building program (classified as inventories). Moreover, we assume COASTAL may allocate approximately RM100mn for renewable energy projects and RM200mn for infrastructure ventures. Management projects RM600mn in vessel sales from 2H25 to 1H27, reflecting its focus on long-term earnings growth and operational expansion while capitalizing on its strengthened financial position.

Papan and Perdiz Plant Operating at Peak Capacity

Recap that COASTAL has been advancing its gas processing operations, supported by Pemex's plans to expand the Papan Plant’s capacity and modify the Perdiz Plant to incorporate LPG recovery capabilities. The expansion initiative is anticipated to be finalized by early next year. In the meantime, gas processing volumes at both facilities have continued to ramp up as planned, reaching their respective maximum capacities. Currently, the Papan Plant operates at a peak capacity of 345mmscfd (2QFY24: 339mmscfd; 3QFY24: 342mmscfd), while the Perdiz Plant has also reached its maximum capacity of 185mmscfd (2QFY24: 162mmscfd; 3QFY24: 179mmscfd).

Potential Conversion of JUGCSU Into MOPU

Recall that Coastal's jack-up gas compression service unit (JUGCSU) remains suspended while discussions on a contract extension are ongoing. Options for the JUGCSU: (i) to convert it into a mobile offshore production unit (MOPU) with a production capacity of approximately 40,000 barrels per day, operating at the current field for five years, or (ii) to continue operating as a JUGCSU at a different field for 5-10 years, which would require modifications due to the water being 20 feet deeper. We understand that Pemex aims to finalize discussions with the JUGCSU's charterer soon (though no time indication is given after the delay), and Pemex appears to favour the first option. We view these developments positively, as they indicate a strong likelihood of a contract extension.

Impact

We have raised our FY25 and FY26 earnings forecasts by 19.8% and 41.7%, respectively, reflecting potential contributions from new revenue streams, including the vessel-building program.

Valuation

Incorporating the successful repayment from the Mexican JV and the strategic allocation of funds, we have upgraded COASTAL from Hold to Buy with a TP of RM2.04/share (previously: RM1.63/share) based on sum-of-parts (SOP) valuation. COASTAL is expected to secure contract extensions for JUGCSU and capacity expansion contract for Papan Plant, providing additional recurring income to the group

Source: TA Research - 11 Dec 2024