Coastal contracts all right for 3Q

Thursday 18 Apr 2024

Coastal Contracts Bhd
(Nov 24, RM3.55)
Maintain outperform with a target price (TP) of RM4.67: Coastal Contract’s net profit for the third quarter of financial year 2014 ending December (3QFY14) of RM54.3 million brought net profit for the first nine months (9M) to RM151.7 million, which is within both our (RM198.2million) and consensus (RM194 million) full-year forecasts, at 76.5% and 78.2%. No dividend was declared. Quarter-on-quarter (q-o-q), net profit increased by 12.6% to RM54.3 million, despite the drop in revenue (4.1% q-o-q). The increase in net profit was mainly due to better product mix (shipbuilding segment profit before tax [PBT] margin firmed up to 23.5% in 3QFY14 against 20.5% in 2Q).

Year-on-year, (y-o-y), net profit was higher (37.4% y-o-y), mainly due to better product mix as mentioned above (shipbuilding segment PBT margin firmed up to 23.5% in 3QFY14 against 20.3% in 3QFY13). Year-to-date (YTD), net profit surged by 47.8% backed by a 38.1% increase in revenue mainly due to: i) higher vessel sales (14 in 9MFY14 against 13 in 9MFY13); and ii) again on better product mix as mentioned above (shipbuilding segment’s PBT margin strengthened to 22.1% in 9MFY14 against 19.8% in 9MFY13).

Coastal-Contracts_theedgemarkets

Coastal’s order book stands at RM2.5 billion (RM1.3 billion for shipbuilding and RM1.2 billion for the gas compression service unit in Mexico which will kick-start in FY15). Coastal is awaiting two high-specification jack-up rigs due in first and second half of 2015. Both these rigs have yet to secure any contracts. However, we understand management is working very hard to close some contract deals soon. This asset will spearhead the company’s move into an asset-ownership model as opposed to the previous build-and-sell model. According to our channel checks, there are more than 40 jack-up rig contracts in Southeast Asia expiring from mid-2013 to 2015. Moreover, there could be cross-selling opportunities with its entry into Mexico.

We maintain our “outperform” rating. We are cognizant of the sector’s derating given the current sluggish crude oil prices; as such we are reducing our price-earnings ratio (PER) on the stock to 11 times (from 14 times). Our ascribed PER is 10% above the 10 times historical -1 standard deviation for oil and gas stocks, as we believe the stock should be credited a premium as it is moving into asset ownership business model. Post our PER cuts, TP is now RM4.67 (from RM5.94 previously).

Risks to our call are: i) lower-than-expected margins and vessel sales; ii) inability to secure contracts for its maiden jack-up rig; and iii) delay or cancellation of its jack-up rig gas compression unit. — Kenanga Research, Nov 24

This article first appeared in The Edge Financial Daily, on November 25, 2014.

Text Size