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Monday, July 27, 2015

Coastal Contracts Bhd - More Vessels Sales

News

COASTAL announced that it has collectively secured contracts for the sale of two units of Offshore Support Vessels (OSV) and six units of low-end vessels for an aggregate value of c.RM130m.
All of these vessels are expected to be delivered by this year.

Comments

This is the 3rd vessel sale order announced by the group since the start of year, bringing total sales order secured to RM1.1b including sale of its first jack-up rig. To note, OSV vessel sales secured this year totaled RM327m.
We have imputed RM800m new OSV vessel orders in FY15 in our forecast. The announcement is a positive to the group given the extremely challenging OSV market with significantly lesser appetite for new-build OSV vessels due to low charter rates.
In total, the group’s orderbook stands at RM3.4b including PEMEX Jack-up Compression Service Unit (RM1.4b) and sale of jack-up rig (RM807m).
We anticipate more firm vessel orders to be secured by the group before the end of this year as it works to secure several firm vessel orders this year.

Outlook

COASTAL is awaiting its 2nd high-specification jack-up rigs due 2HCY15, which has yet to secure charter contract at the moment.
However, we understand management is working very hard to close some deals soon. If no contract is secured, the management will elect to dispose the rig pre-actual delivery to reduce their risk exposure.
Recall on 14th April 2015, the group has announced sale of its first Jack up Drilling unit which is profit making, rendering them from high asset costs upon delivery amid weak drilling market. Profits from the sale can only be realised in 3Q15 when the asset sale is due for completion.
While 2015 is expected to be a strong year for COASTAL, earnings are expected to be slightly weaker in 2016 due to the slower overall OSV market, reducing the potential for more new vessel orders.

Forecast

We maintain our forecast.

Rating

Maintain OUTPERFORM

Valuation

Fair value maintained at RM3.47 based on unchanged 9.0x CY16 PER.
This is consistent with valuations of small-mid cap O&G players which range from 7x to 10x in a down-cycle.

Risks to Our Call

Lower-than-expected margins and vessel sales,
Inability to secure contracts for maiden jack-up rig, and
Delay or cancellation of jack-up rig gas compression unit.

Source: Kenanga Research - 27 Jul 2015

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