Coastal Contracts - 4Q12 results misses expectations

Period  4Q12/12M12

Actual vs. Expectations    4Q12 net profit of RM28.4m brought FY12 net profit to RM90.2m. This was below our expectations, accounting for only 93% of our full-year net profit estimate (RM127.1m) and 87% of consensus’ (RM135.5m). The variance was mainly due to the lower-than-expected net margin (15.5% versus our 17.0%) on the vessel business.

Dividends  Final NDPS of 2.8 sen was declared, bringing full year DPS to 5.6 sen. This was above our FY12E NDPS of 3.8 sen.

Key Results Highlights  QoQ, despite a better revenue (+9.4%) due to the increased high-end OSV deliveries (4 units) compared to 3Q12 (3 units), net profit was down 6.9% mainly due to the narrower margins on the sales coupled with the slight loss in its vessel chartering division.

 YoY, revenue was down (-11.7%) due to the lower vessel deliveries (4 units vs. 13 units in 4Q11) while the net margin was also lower due to the lower shipbuilding margins for 2012. Whilst the thinner margins were guided by management due to the normalisation of market conditions for the shipbuilding industry in the region it is still below our previously assumed margin of 17%.

Outlook  The net profit margin from FY12 onwards has been guided to be around 15-25% (down from the 26-30% recorded in previous years) due to the normalisation factor mentioned above.

 Coastal hopes to diversify its income streams to: 1) fabrication and engineering and 2) FPSO and FSO, which would be a catalyst to its short-term earnings.

Change to Forecasts  Given the less-than-sterling results, we are trimming our FY13-14 net profit estimates by 6.3% and 4.6%. Our main cuts are to our FY13-14 net profit margin assumptions, which now stand at 16.6% and 18.1% (from 18.5% and 20% previously).

 However, we are raising our FY13-14 NDPS to 6.2-7.1 sen (from 4.4-4.9 sen) to reflect the higher payouts.

Rating    DOWNGRADE TO MARKET PERFORM (FROM OUTPERFORM)

Valuation  Our fair value estimate has fallen slightly to RM2.10 (from RM2.24) based on an unchanged 7.5x PER and lowered CY13 EPS of 28.0 sen. Our targeted PER is in line with the 7.5x PER target ascribed to other small-cap oil and gas stocks e.g. Uzma.

 We are downgrading our call to a MARKET PERFORM, given that the total upside is now only 7% (a potential 4% capital upside and 3.1% dividend yield) and prospect of thinning shipbuilding margins.

Risks   1) Continued sluggish orders and margin erosion; and

2) inability to gain new forms of business.

Source: Kenanga