Coastal Contracts Bhd - More vessel sales

News    The company announced that it had secured sales for 3 new vessels - 2 Anchor Handling Tug Supply (AHTS) and 1 Subsea Support Vessel (SSV) - with an aggregate value of approximately RM111m. 

 The two units of AHTS were sold to a loyal Indonesian customer while the SSV was sold to a new customer from United Arab Emirates.

 The vessels are expected to be delivered in 2012-2013.

Comments   We are positive on the news as the company is still securing orders for new vessels.  

 There was no guidance in regard to margins and the split for the delivery timelines but the company announced that its current orders now stood at RM743m. 

 As mentioned in our previous reports, this has already exceeded the company’s FY11 year-end order book of RM610m. That said, we expect the trend to moderate as deliveries are recognised within the year.

Outlook   The net profit margin has been guided to be more modest at around 15%-25% from FY12E onwards (vs. 25%-34.9% in past 5 years) due to the normalisation of market conditions for the shipbuilding industry  in the region.

 Its 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 source of earnings.  

Forecast   We are maintaining our earnings estimates at this juncture given that we have already imputed for some new order wins (12 AHTS and 20 tugs and barges) for FY12.

 The catalysts to raise our forward estimates will be if the current year-end order book is significantly above that of last year, and a diversification in business to FPSO or FSOs.

Rating  Maintain OUTPERFORM

Valuation    Our unchanged target price of RM2.53 is based on a targeted PER of 7.5x on FY13 EPS of 33.7sen.

Risks   1) Continued sluggish orders and margin erosion, and

2) inability to gain new forms of business.

Source: Kenanga