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Thursday, September 11, 2014

Coastal Contracts (5071) aims doubled market capitalisation within next five years


KUALA LUMPUR: Sandakan-based shipbuilder and offshore support vessels operator Coastal Contracts Bhd is extending its participation in the oil and gas (O&G) upstream segment and hopes to have its market capitalisation doubled to at least RM5 billion within the next five years, executive chairman Ng Chin Heng told The Edge Financial Daily in an interview.

“We will own and operate one jack-up gas compression service unit (JUGCSU) as well as two jack-up drilling rigs. As long as we secure charter contracts for these three offshore assets, we [our market capitalisation] will be there,” said Ng, who is also the principal founder and major shareholder of Coastal Contracts with a 44.7% stake.

“I still have big dreams and I am confident of pursuing them. I have many big expansion plans to strengthen our upstream business. The value of these projects is going to be bigger than any of our ongoing projects,” he said.

From about RM2.60 a year ago, Coastal Contracts’ share price almost doubled to close at RM5.03 last Friday, giving it a market capitalisation of RM2.67 billion.

“Previously, some people thought our counter was speculative and they didn’t like our business model. Now, with our expansion plans in place, I don’t think even the current price is expensive. At our target market capitalisation of RM5 billion, each share could be worth some RM10,” said Ng.

Nevertheless, he said the share price target of RM10 apiece or a market capitalisation of RM5 billion is merely an internal target, but one which the management will strive hard to achieve.

In late February this year, Coastal Contracts tapped into the offshore production solutions segment after securing a RM1.24 billion charter contract to provide a JUGCSU that will be deployed to work in the Cantarell Oil Complex, in Gulf of Mexico, for Mexican national oil firm Petroleos Mexicanos (Pemex).

The charter contract is for a period of eight years with an extension option of up to 12 years.

Ng said the charter contract for the JUGCSU — which costs US$215 million (RM684) to build — will deliver an internal rate of return of more than 15%.

The JUGCSU is expected to be delivered by the second quarter of 2015 (2Q15), and starts contributing to the group’s bottom line in the second half of next year (2H15). Estimated profit to be derived from the JUGCSU will range from RM30 million to RM40 million a year, from 2016 onwards.

Coastal Contracts reported a net profit of RM151.2 million in the financial year ended December 2013 (FY13), with analysts expecting the numbers to grow to RM194 million in FY14 and RM224.8 million in FY5.

“We like long-term contracts, such as the one we have secured with the JUGCSU. It seems to us that this [the JUGCSU charter business] is more interesting than the drilling rig charter business,” said Ng.

He explained that the current market outlook for the rig chartering business is not challenging, with the group yet to clinch any contracts in this segment.

Coastal Contracts will take the delivery of its maiden jack-up drilling rig — dubbed Coastal Driller 2001 — in the fourth quarter this year, with the second unit to come in the end of 2015. The first unit costs about US$215 million and is currently being constructed in China.

Ideally, Ng said the initial plan for the two jack-up drilling rigs was to secure charter contracts in Mexico, where Coastal Contracts has a presence, so that it can manage the operations easier. He said the group is trying to negotiate a three- to four-year charter contract, which could be worth some US$100 million to US$200 million each for the two rigs.

“In the past 12 months, we have seen a lot of opportunities to sell the rigs. But since I had promised investors that we will diversify into upstream, we will continue to pursue the charter contract [for the jack-up drilling rigs],” he said.

Ng said that Coastal Contracts’ current priority is still Mexico, but alternatively, the jack-up drilling rigs could be deployed to other places such as Nigeria, the Middle East or here in Malaysia.

However, he did not rule out the possibility of selling the rigs.

“If we are still unable to secure a contract,we might still consider selling the rigs. Assuming that we have already secured a charter contract before we sell the rig, we could even sell it together with the contract. I’m sure there will be many interested buyers and we can get a good price,” said Ng.

Besides the above mentioned three offshore assets, which are the next big thing for Coastal Contracts in the medium term, the group also has intention to undertake merger and acquisition (M&A) activities to expand its existing businesses.

“By next year, hopefully, we will be able to share more details with you. We have identified a beautiful target, but we have had some bad experiences in M&As, so you can say we are lacking confidence in this area,” Ng said.

“Having said that, with or without M&As, we still can achieve the targeted market capitalisation of RM5 billion [within the next five years],” he added.

According to Bloomberg, all five analysts polled have positive ratings on Coastal Contracts, with immediate target prices ranging from RM5.90 to RM6.

This article first appeared in The Edge Financial Daily, on September 8, 2014

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