Coastal Contracts announced yesterday (21 Oct 2013) that it secured RM318m in vessel sales order comprising: one subsea support maintenance vessel, one platform supply vessel, and four anchor handling tug supply vessels. This effectively brings its YTD contracts secured to RM1.35bn, with RM1.28bn in outstanding sales orders as at 21 Oct 2013. The vessels are to be sold to a mix of both returning as well as new clients, deliverable in 2013 and 2014.
This is a strong win for Coastal Contracts, as it brings its sales secured to 2008 levels of more than RM1bn, though at lower vessel prices compared to the oil and gas boom at that time (operating margins of 15- 20% are expected for 2013-2015 vs. c.30% in 2010-2011).
The stock is a strong proxy for crude oil price, which has retained its resilience at US$99/bbl.
Maintain BUY with RM3.35 price target and earnings under review, pending further clarity on vessel delivery timings. source: HwangDBS Vickers Research
These new contracts boosted Coastal’s order book to circa RM1.35b, which elevated its vessel sales to a new record high.
YTD 2013 total vessel sale of RM1.35b is almost double the amount achieved in 2012 of RM698.0m.
Looking back, the previous peak was in 2008 when COASTAL locked in RM919.2m of vessel sales.
While the PER valuation may seem high for Coastal given that its 5-year average +2 standard deviation level is only at 10.1x, the valuation upgrade is for its potential new earnings streams and its strategic evolvement into an offshore asset owner.
Moreover, the recent pick-up in vessel sales is an indication that the oil and gas shipbuilding industry could be back on an upward trajectory which will provide more opportunities for Coastal.
Our unchanged target price of RM3.87 is based on a target CY14 PER of 12x, at a 15% discount to the CY14 PER of 14x ascribed to industry peer PERISAI (OP; TP: RM1.76). source: Kenanga
As its current orderbook of MYR1.29bn is within our estimate of MYR1.5bn (FY13: MYR650m; FY14: MYR850m), we keep our FY13 and FY14 earnings estimates unchanged.
Management has yet to secure a contract for its USD200m (MYR641m) jack-up rig slated for delivery in 2H14. This deprives the stock of the premium that other offshore asset owners are currently trading at. Management has indicated the possibility of selling the rig should it fail to secure a contract. Given a lack of clear indication on this matter, our FY14 earnings estimate does not take either outcome into account.
Maintaining NEUTRAL, with MYR3.00 FV. Our unchanged FV of MYR3.00 is based on 10x FY14F P/E. Securing a contract for its jack-up rig may easily re-rate COCO to 13-14x forward earnings, in line with those of other offshore asset owners. source: RHB