Coastal - BUY - 15 May 2008

Coastal Contracts - Acquires more land (Company Update)



Price: RM2.36

Target Price: RM3.48

Recommendation: BUY



· Company announced that its wholly owned subsidiary - Pleasant Engineering Sdn Bhd had entered into a Sale and Purchase agreement to acquire four parcels of land measuring approximately 22 acres together with industrial and other buildings erected thereon for a cash consideration of RM4m.

· We are very positive with the above acquisition as the new land is situated next to its original yard at Sungai Seguntor, Sandakan which is already filled to the brim with work orders. The new yard being next to it will therefore help to alleviate the current tight situation.

· Acquisition price of RM4m or RM4.17 psf is reasonable. Even though not as cheap as the previous acquisition where Coastal bought the new 52 acre yard for a mere RM2m (RM0.88 psf) in 2006, the current acquisition will still be very synergistic, being situated next to the original yard (17.6 acres) enabling a single contiguous yard space of 39.6 acres. This would provide better flexibility in planning more efficient location of slipways maximising the land usage for more shipbuilding.

· Meanwhile, company's 1Q08 results should be announced some time next week. Preliminary guidance is that it will be another good quarter given the prevailing market condition for offshore support vessels which had remained strong.

· Management is optimistic that confirmed order book will likely rise by another RM300m - RM400m progressively over the year to reach an eventual size of RM1.4b - RM1.5b. Recent conversations with management have revealed that enquiries for vessels had remained very strong. According to sources, many new buyers introduced via shipbrokers including RS Platou have expressed interest to acquire vessels from the company. In fact, we gather that the company had been approached by one of the largest offshore support vessel operator in the west with a fleet size of more than 400 to be their partner in their fleet renewal program. Currently trading at a mere 10x current year's earnings, our BUY is maintained with a target price of RM3.48.





KENANGA INVESTMENT BANK BERHAD (15678-H)