Coastal Contracts Bhd - OUTPERFORM - 25 May 2012

Period    1Q12

Actual vs. Expectations

 The 1Q12 net profit of RM30.8m was significantly below expectations, accounting for just 15% or our full year estimate (RM205.1m) and that of the consensus (RM205.0m). 

 The variance was due to the lower-than-expected PBT margin of 13% (versus our assumption of 27.5%).

Dividends   No dividend was declared in the quarter.

Key Results Highlights

 YoY, 1QFY12 PBT fell 45% due to the extensive discounts given to certain shipbuilding and repair customers within the quarter. PBT margins dipped from 35.7% previously.  

 QoQ, the 1QFY12 PBT was also down 42%, similarly due to the discounts given to the shipbuilding and repair customers. The PBT margin decreased from 23.8% in 4Q11. 

 The discounts are guided to be non-recurring so sequential margin expansion in the next quarter is expected.

 The chartering business, which reported wider losses of RM1.2m, was hit by lower fleet utilisation as short-term charter contracts had expired during the quarter. 

Outlook   To date, the shipbuilding and repair orders are still sluggish but management is hopeful that it will pick up in the later quarters.

 Net profit margin was guided to be more modest at around 15-25% from FY12E onwards 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

 We have reduced our FY12E net profit estimate by 27.7% to RM148.4m as we have factored in a lower GP margin of 23% (from 30% previously). This led to a reduced net profit margin of 19.9% (from 27.5%). We also introduced FY13-14E earnings estimates, which feature 1) a slight GP margin expansion to 23% as we expect margin expansion once the company starts supplying higher-spec vessels. We expect total vessel orders to grow at 5% p.a..

Rating  MAINTAIN OUTPERFORM

Valuation    We have rolled forward our valuation basis to FY13E. With an unchanged target PER of 7.5x, we have reduced our fair value to RM2.53 (from RM3.18). However, we note there is still significant upside (~38%) for the current share price. Hence, the stock is still grossly undervalued. Outperform. Risks  1) Continued sluggish orders and margin erosion and 2) inability to gain new forms of business. 

Source: Kenanga