KUALA LUMPUR (Dec 24): Coastal Contracts Bhd’s (KL:COASTAL) maiden foray into the renewable energy (RE) sector is timely while providing long-term income visibility for the oil-and-gas services firm, said RHB Investment Bank (RHB IB).

The project in Sabah could generate around 10%-12% annual returns on investment, the research house said, citing estimates from Coastal's management. Coastal may have secured potentially better tariffs as the state government historically offered higher rates, it noted.

“We are optimistic about Coastal Contracts' announcement of its maiden solar project, marking its entry into the RE sector and diversifying its revenue stream,” RHB IB said and maintained its ‘buy’ call on the stock.

On Monday, Coastal secured the bid to develop a 15-megawatt large-scale solar photovoltaic plant on Sabah's east coast. The power purchase agreement with Sabah Electricity Sdn Bhd will span 25 years, and the plant must begin commercial operation between April 1, 2027, and June 30, 2027.

Coastal’s wholly owned subsidiary, Coastal Power Holdings Sdn Bhd, holds a 90% stake in the consortium with the remaining 10% held equally by Pleasant Engineering Sdn Bhd and Bina HT Sdn Bhd.

RHB IB estimates that the project could contribute RM2 million to RM3 million annually to Coastal’s earnings when completed from 2027 onwards.

Nevertheless, the diversification is crucial as its reliance on Petroleos Mexicanos, the Mexican state-owned petroleum company also known as Pemex, poses income concentration risk, the research house flagged.

Coastal has been “proactively building a dedicated team to support its transition into the RE sector, ensuring it has the expertise to capitalise on emerging opportunities,” RHB IB said, noting that the project is also in line with the National Energy Transition Roadmap and Corporate Renewable Energy Supply Scheme.

Currently, there are two ‘buy’, one ‘sell’ and no ‘hold’ calls. The consensus 12-month target price is RM1.86, according to Bloomberg, implying a potential return of over 20.8% from its last price of RM1.54.

Shares of Coastal, which has a market capitalisation of about RM845 million, have retreated 6.67% this year.

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