Coastal - BUY - 16 May 2008

Coastal Contracts - Order book surpasses RM1 billion mark (Company Update)



Price: RM2.37

Target Price: RM3.48

Recommendation: BUY



· Company announced that it has secured the sale of 2 offshore support vessel via its subsidiary - Thaumas Marine Ltd for USD62 million (RM201.5m) or RM100.8m each which according to our records should be the most valuable contract per vessel for the company. With this sale, the company's order book is now at RM1.2 billion with delivery stretching up to 2010.

· Record selling price per vessel. While details of the two vessels are not revealed including its buyer, but given the high selling price of at least RM100m each lead us to believe that it could be at least 70m in length with engine capacity of 10,000 bhp. Delivery is slated for 2010.

· Recall that in October last year when the record RM365m deal was announced for the delivery of 4 vessels including two 70m x 10,880 bhp AHTS, those two vessels based on our estimates have a price tag of RM97m each. Should these two to be of similar specifications, prices of the vessels would have improved by an additional 3.9%.

· Order book now at RM1.2billion after having secured RM518m during the first 5 months of the year. With such a high order book stretching up to 2010, earnings visibility likewise will be high. Based on our cumulative sales forecast of RM1.26billion between 2008-2010, company has already achieved some 95% of our forecast for the coming three years!

· We are very positive with the deal. Besides the headline numbers, what really impressed us was the fact that company's reputation as a world-class offshore support vessel builder is firmly entrenched especially in the bigger type vessels including the 10,000 bhp category. Previous skepticism of the company being restricted to building the smaller vessel type namely the 5,000 bhp and below should be clearly expounded now with this current deal. We believe that company's growing reputation especially in the higher class vessels where demand is expected to increase further on the back of a shift of exploratory work towards the deeper waters globally should be a boon for the company.

· Not resting on laurels. Even with the record orders, management we gathered is working extremely hard to continue to add to their order book. As guided much earlier, time and resources are now trained on growing their order book even beyond 2010!

· Yesterday's announcement on the yard acquisition is timely, as its original yard of 17 acres is already filled to the brim with work orders. Meanwhile, our sources have indicated that talks with a major offshore support vessel owner remain on track which if successful can potentially open up new market for the company's vessels.

· Forecast and recommendation unchanged. BUY is maintained. With delivery slated for 2010, impact therefore will be in FY10. Based on a conservative net margin of 20%, the RM201m deal is expected to generate some RM40m in net profit or 11sen EPS. High order visibility, strong management and an undemanding valuation of 10x for current year's earnings are key drivers for our BUY recommendation. Our target price of RM3.48 is maintained.







KENANGA INVESTMENT BANK BERHAD (15678-H)