Coastal Contracts 2Q12 broadly within expectations

OUTPERFORM
Target Price: RM2.53

Period
2Q12/1H12

Actual vs. Expectations

• 2Q12 net profit came in at RM28.9m, bringing the 1HFY12 net profit to RM59.7m.  
• The results are broadly within our expectations, making up 40% of our full year estimate (RM148.4m). However, it is only 35% of the consensus estimate (RM168.7m).  
• The variance to our numbers is mainly due to the lowerthan- expected 1Q12 performance, which was marred by extensive discounts.  
• The management is, however, guiding for a stronger set of 2H12 results on the back of higher-margin vessel deliveries. 

Dividends

• A first interim tax-exempt DPS of 2.8 sen has been announced in 2Q12. This is lower than the tax-exempt DPS of 4.2 sen declared in 1H11. However, it is still within our FY12 full year NDPS of 4.5 sen.  
• We are anticipating a lower NDPS vis-à-vis 2011 given the lower earnings from shipbuilding business. Key 

Results Highlights  

• YoY, the 1H12 net profit was down 42% as Coastal continued to face lower margins (PBT margin down to 16% from 26.1% in 1H11) in its shipbuilding business. This is expected as management had previously guided that it will no longer enjoy the premium margins seen in 2011 and before, given the normalisation of market conditions for the shipbuilding industry in the region.
• QoQ, despite the revenue dropping by 31%, (due to lower vessel deliveries), the bottom line erosion was mitigated by higher margins from sales in the quarter, which resulted in a PBT margin expansion to 19.4% (from 13.7% in 1Q12). Note that the dismal 1Q12 margins were due to excessive discounts being given on several vessel sales. 

Outlook

• Management expects to deliver higher-margin vessels in 2H12.  
• Net profit margin was guided to be around 15-25% from FY12E onwards (from the 26-30% recorded in previous years) due to the normalisation of market conditions for the shipbuilding industry in the region.  
• Forays into different businesses like 1) fabrication and engineering and 2) FPSO and FSO have yet to take off. Management is still actively looking out for opportunities to diversify its sources of earnings.

Change to Forecasts  
Maintaining our FY12-14E estimates for now given management guides for a better 2HFY12.

Rating 
MAINTAIN OUTPERFORM

Valuation

• Our fair value of RM2.53 is based on an unchanged 7.5x targeted PER (in line with the 7.5x PER target ascribed to other small-cap oil and gas stocks e.g. Uzma).  
• We note that there is still a hefty 38% total upside to the current share price. As such, the stock is severely undervalued, in our view. 

Risks
1) Continud sluggish orders and margin erosion and
2) inability to gain new forms of business.


Source: Kenaga