Stronger earnings ahead for Coastal Contracts

Stronger earnings ahead for Coastal Contracts
Business & Markets 2013
Written by HwangDBS Vickers Research
Friday, 29 November 2013 11:04

Coastal Contracts Bhd
(Nov 28, RM3.25)
Maintain buy at RM3.25 with a revised target price of RM3.75 (from RM3.35): Net profit for the third quarter ended Sept 30 of 2013 financial year (3QFY13) jumped 29% year-on-year (y-o-y) (23% quarter-on-quarter [q-o-q]) to RM40 million on the back of stronger revenue (10% y-o-y; 36% q-o-q) and higher earnings before interest and tax (Ebit) margin (20.3% versus 16.4% in 3QFY12).

The higher turnover was driven by a stronger US dollar (RM3.2595 per US dollar against RM3.059 in 3QFY12) and better vessel sales mix. It sold three barges and three offshore support vessels (OSVs) in 3QFY13 compared to two tugboats, a barge and four OSVs in 3QFY12.

Its earnings for the first nine months (9M) of FY13 were almost 74% of our and consensus’ estimates.

We are optimistic on the near-term outlook for Coastal Contracts, with earnings supported by its RM1.3 billion order book after having secured record orders worth RM1.35 billion year-to-date.

Vessel pricing remains stable, driven by demand for replacements (43% of the global offshore fleet is at least 20 years old) and continued oil investments, particularly in Brazil and Indonesia. We expect Ebit margins to improve steadily as the company secures orders for more technically advanced (and higher margin) vessels.

Coastal Contracts will also see stronger recurrent income from potential jack-up rig contracts upon delivery of its rig by CIMC Yantai in the first half of 2014. We assume revenue recognition from a jack-up contract in 2015.

We raise FY14F and FY15F earnings by 8% and 15% after imputing higher order win assumptions and revenue recognition schedule. As a result, our target price is nudged up to RM3.75, pegged to 10 times FY14F earnings per share. Potential rerating catalysts include clinching jack-up rig contracts ahead of rig delivery and progress in potential floating storage and offloading/floating production, storage and offloading ventures in Indonesia, although the latter would be a longer-term strategy given capital constraints. — HwangDBS Vickers Research, Nov 28




This article first appeared in The Edge Financial Daily, on November 29, 2013.