Monday, 19 December 2011

Coastal: More wind in its sails

Coastal Contracts Bhd (Dec 16, RM1.92)

Maintain buy at RM1.79 with target price of RM3.25: Coastal scored RM233 million worth of vessel construction contracts — two offshore support vessels (OSV) for longtime client Tidewater Group, one OSV and two landing craft to customers from Nigeria and Malaysia (both new), and two barges from an Indonesian return customer. This brings its outstanding order book to RM610 million as at last Friday, with year-to-date order wins at RM690 million.

Though these contracts were certainly a welcome surprise to end the current year, earnings impact will only be felt in 2012, as Coastal has a policy of recognising revenue upon vessel delivery. Thus we absorb the above contracts into our FY12 order book assumption of RM710 million wins (33%). We retain our cautiously optimistic outlook for FY12 as margins shrink from continued excess OSV supply (especially in the less than 8,000 BHP range) while oil and gas activity could slow due to possible liquidity issues in Europe and the cascading effect on global markets.

We maintain our “buy” call on Coastal with RM3.25 target price, pegged to eight times FY12 earnings per share (EPS) of 40.5 sen. We like Coastal for its cheap valuations (4.4 times FY12F EPS against 12 times peer average and trading at slightly above -1 standard deviation of 3.2 times), consistency in delivering stellar results (43% compound annual growth rate for FY07 to FY10A earnings), net cash position with solid operating cash flows (RM196.7 million cash pile) and cost efficient business structure (circa 30% net margin). The stock price should be supported by persistently high oil prices (US$94per barrel as at last Thursday). — HwangDBS Vickers Research, Dec 16

This article appeared in The Edge Financial Daily, December 19, 2011.

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