Coastal Contracts - 3Q12 misses expectations

Period    3Q12/9M12

Actual vs. Expectations   3Q12 net profit of RM30.5m brought 9M12 net profit to RM90.2m, which only accounted for 60.1% of our fullyear net profit estimate (RM148.4m) and 62% of consensus earnings (RM145.8m).

 The variance to our numbers was mainly due to the lower-than-expected margins on the vessel deliveries in the quarter, which were unable to offset the detrimental effect of the low-margin deliveries recorded in 1Q12.

Dividends   No dividends were declared in the quarter.

Key Results Highlights  QoQ, despite the revenue increasing by 10.1% (due to increased vessel deliveries and a healthier charter segment performance), the net profit was only up by 5.5%, mainly due to forex losses from the weakened USD. 

 YoY, despite better revenue (+14.1%), 9M12 net profit was lower (-35.3%) as Coastal continued to face lower shipbuilding division margins. 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. 

 However, we noted that the earlier poor 1Q12 net profit margin of 13.2% was one of the main causes of the YTD earnings being lower than our initial FY12 estimate.

Outlook   The net profit margin from FY12E onwards has been guided to be around 15-25% (down from the 26-30% recorded in previous years) due to the normalisation of market conditions for the shipbuilding industry in  the region.

 Coastal’s 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  Given the less than sterling 9M12 performance, we are cutting our FY12-14 net profit estimates by 14.3%, 11.4% and 4.5% respectively, mainly due to our lower FY12-14 net profit margin assumptions of 17%, 18.5% and 20% respectively (from 19.9%, 20.9% and 20.9% respectively previously). 

Rating  MAINTAIN OUTPERFORM

Valuation    Our new fair value of RM2.24 (from RM2.53) is based on an unchanged 7.5x PER on our adjusted CY13 EPS of 29.9 sen. 

 Our target PER is in line with the 7.5x PER target ascribed to other small-cap oil and gas stocks e.g. Uzma.

 Given the total upside of 14% (12% share price upside and 2.1% dividend yield), we are maintaining our OUTPERFORM call. However, we highlight that there seems to be no near-term catalysts for the stock; besides the margin accretion from the higher margin vessel sales; until Coastal is effectively able to diversify its  earnings sources.

Risks    1) Continued sluggish orders and margin erosion, and       

2) inability to gain new forms of business.   

Source: Kenanga