Coastal Contracts Bhd
(April 9, RM2.90)
Maintain buy with target price (TP) of RM3.35: We cut our forecast financial year ending December (FY15F) and FY16F earnings after removing charter earnings from the jack-up drilling rig Coastal Driller 4001 (CD1).

Coastal has guided that they are negotiating to sell CD1. Accordingly, the rig delivery has been pushed back to the second quarter (2Q) of FY15, in hopes they will secure a back-to-back transaction with the buyer. This is positive as it would improve Coastal’s risk profile given excess supply in the jack-up market. On the second rig, we assume it will also be sold and have excluded that from our earnings model. But if Coastal secures a charter contract, we may raise earnings by 10% to 15% for FY16 and beyond.

Rigs aside, FY15 shipbuilding earnings are intact with a secured RM1.5 billion order book. We have assumed an additional RM1 billion worth of new vessels in FY15 /FY16. But with demand for vessels slowing, we expect orders to trickle in only in late FY15 or FY16. Coastal has indicated there have been no renegotiations for current vessel sale contracts, and therefore, we believe shipbuilding profit before tax (PBT) margin should be sustainable at around 20%.

In FY15, growth will be led by the RM1.3 billion, 8+4 years gas compression contract (GCSU) from Petroleos Mexicanos (Pemex). The unit will be ready to start work in early 3QFY15. We have factored in five months earnings (RM12.1million PBT) from the GCSU in FY15 and RM600 million borrowings upon delivery. For FY16, the GSCU is expected to add RM31.7 million to group PBT.

Our TP is lowered (nine times price-earnings ratio FY15F) from RM3.80 after trimming earnings. Given strong earnings visibility backed by a solid order book, and a clean balance sheet, we maintain our “buy” call for on Coastal. — AllianceDBS Research, April 9

This article first appeared in The Edge Financial Daily, on April 10, 2015.