Coastal Contracts Bhd
(Sept 29, RM4.80)
Outperform with target price of RM5.94: Last week, Coastal Contract Bhd (Coastal) announced it secured the sale of seven offshore support vessels (OSVs) worth a cumulative value of RM444 million. The vessels are expected to be delivered between financial year 2014 (FY14) and FY15.
This current sale award brings its cumulative FY14 vessel sales to RM802 million and brings its shipping order book to RM1.4 billion (total order book is RM2.6 billion, inclusive of the jack-up compression service unit project worth RM1.2 billion).
The shipbuilding division is currently riding the cyclical uptrend. Although net margins have normalised to 15%-25% from FY12, the shipbuilding industry is still considered lucrative, in our view. Order book (as at June 18) stands at RM1.4 billion.
Coastal’s maiden jack-up rig is due for delivery by end of the second half (2HFY14). No contract has been awarded yet, but this asset will spearhead the company’s move into an asset-ownership model versus the previous build-and-sell model.
Our channel checks show over 40 jack-up rig contracts in Southeast Asia have, and will be, expiring from mid-2013 to 2015, which implies abundant opportunities on the horizon. Moreover, there could be cross-selling opportunities with its entry into Mexico.
Coastal’s long-term jack-up rig compression unit (Jugcsu) earnings will kick-start in FY15.
We maintain our earnings estimates as this contract comes within our FY14 assumed wins. We are currently “neutral” on the sector’s prospects as we foresee a short-term slowdown in contract awards. As such, we have reduced our price-earnings-ratios (PER) by 1 times for a majority of stocks within our coverage.
We maintain our target price of RM5.94, based on an unchanged 14 times PER on calendar year 2015. Risks to our call are (i) lower-than-expected margins and vessel sales, (ii) inability to secure contracts for maiden jack-up rig and (iii) delay or cancellation of its jack-up rig gas compression unit. — Kenanga Research, Sept 29
This article first appeared in The Edge Financial Daily, on September 30, 2014.