This article first appeared in The Edge Financial Daily, on April 15, 2016.

Coastal Contracts Bhd
(April 14, RM1.70)
Maintain hold with target price (TP) of RM1.65: Coastal Contracts’ (Coastal) outstanding contractual offshore support vessel (OSV) order book stands at RM1.2 billion, which will keep it occupied until the first half of calendar year 2017 (1HCY17). 

As its shipbuilding segment is riding rough waves, management has decided to put on hold the building of new vessels until all current vessels have been sold off, including the RM500 million build-to-stock in its backlog. 

In view of the current prevailing weak crude oil prices, oversupply in the OSV market could persist longer, potentially leading to slower order book replenishment. As such, it is unlikely that financial year ending June 30, 2016 (FY16) or FY17 will see stronger earnings delivery for OSV sales.

Coastal’s RM1.5 billion 12-year long-term asset charter contract to supply jack-up gas compression units (JUGCSU) to Petroleos Mexicanos (Pemex) was slightly delayed to end-1HCY16 versus its initial plan. It is currently undergoing commissioning in Mexican waters, and is slated to commence work with Pemex by 2HCY16. 

OSV orders replenishment has been slow to materialise and as such, the JUGCSU charter to Pemex will be able to partially offset the decline in the OSV business. 

We forecast a profit before tax contribution of approximately RM34 million per annum for the next 12 years of the contract duration.

Recall that Coastal has changed its financial year end from December to June; hence, FY16 forecast (FY16F) will consist of 18 months. We cut our FY16/FY17/FY18F earnings by 1%/15%/2% respectively to reflect lower OSV order book replenishment and margins. 

Post-earnings downgrade, our TP drops to RM1.65 — pegged to an unchanged seven times FY17F price-earnings ratio (PER). Maintain hold. Our seven times PER target is close to the group’s historical average trough valuations.

Slower-than-expected vessel order replenishment for FY16-FY18 will result in earnings downside. — AllianceDBS Research, April 13