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Wednesday, February 26, 2014

oastal Contracts Bhd - Coasting to a stellar end


Period 4Q13/FY13

Actual vs. Expectations Coastal Contract Bhd’s (COASTAL) 4Q13 net profit of RM49.0m brought its FY13 net profit to RM151.6m. This is above both our (RM135.4m) and consensus (RM140.8m) full-year expectations at 112% and 108% respectively.

The variance to our forecast is mainly due to higherthan-expected margins for its vessel sales.

Dividends Final NDPS of 3.4 sen was declared, bringing full year DPS to 6.4 sen. This is slightly above our FY13E NDPS of 6.2 sen.

Key Results Highlights QoQ, net profit and revenue were up by 24.0% and 31.0% respectively due to the higher number of vessels being delivered (5 units versus 3 units in 3Q13).

YoY, net profit was also higher (+72.5%) mainly due to: (i) higher vessels sales, and (ii) better margins derived from the sale of vessels.

Outlook Net margin for the shipbuilding division is guided to be around 15-25% from FY12 onwards due to the normalisation of market conditions.

COASTAL's maiden jack-up rig is due to be delivered in mid-14, which will spearhead its move into an asset ownership model versus the previous build-and-sell model.

According to our channel checks, there are >40 jack-up rig contracts in South-east Asia that are 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.

Change to Forecasts

Given the stellar shipbuilding results, we have increased our FY14 net profit by 11% to RM172.8m on the back of a 13.6% revenue growth (versus 5.6% growth previously) as we expect about at least 80% of the current order book to be recognised within FY14.

Given that investors are now looking at long-term prospects for the oil and gas sector, we also introduce our FY15 net profit of RM198.7m which features: (ii) 8.4% shipbuilding revenue growth and (ii) four months worth of jack-up rig gas compression unit earnings.

We highlight that the FY14-15E net profit forecasts do not include potential jack-up rig earnings which will be delivered by July-Aug 14. A win within this year will be a further catalyst to earnings.

Rating Maintain OUTPERFORM

Valuation Our new target price is RM5.76/share (from RM4.51) based on a target CY15 PER of 14x.

Whilst this PER valuation is above the stock’s historical average +2 standard deviation PER of 11.9x, we believe this is justifiable as it is moving into asset ownership (versus just depending on vessel sales).

Risks to Our Call (i) Lower-than-expected margins; and (ii) Inability to secure contracts for maiden jack-up rig.

Source: Kenanga

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