Coastal Contracts - BUY - 23 May 2008

Coastal Contracts - A new quarter, a new record (Results Note)



Price: RM2.38

Target Price: RM3.48

Recommendation: BUY



· Record quarterly revenue and net profit which is in line with expectations. Reported revenue of RM90.9m is 24.7% of our full year's forecast while net profit of RM21.0m is 25%. Continuing strong demand for offshore vessel and on time delivery backed by a strong execution track record had underpinned the current strong set of interim.

· QoQ, revenue was up by 11.2% to RM90.9m despite the record number achieved in 4Q07. Net profit meanwhile was up a stronger 23.4% due to a combination of higher specifications delivery and an overall bullish environment for offshore vessels. For the quarter, we believe that the company had delivered 15 tugs/barges and 1 offshore support vessel versus 10 tugs/barges and 1 offshore support. A special point to note is that pricing for offshore vessels that are being delivered within the next few quarters are very likely to have been signed in late 2006 or early 2007 which therefore might not be reflective of the higher prices that we are experiencing at the moment. Going forward, there is potential for the company to be reporting vessels sales of higher values due to the buoyant environment.

· YoY, revenue was up 32.8% while net was higher at 38.5%, boosted by lower effective taxes. The better performance is underpinned by a more aggressive delivery in 1Q08 of 16 vessels (15 tugs/barges and 1 offshore support) versus 10 in 1Q07 (9 tugs/barges and 1 offshore support).

· Margins have continued to stay strong despite an overall higher cost environment. Concerns of a potential margin squeeze are unfounded as evidenced by the current strong set of interims. Management have always guided that due to the current strong demand for vessels, higher costs including steel plates etc are passed on with minimal resistance. With record high prices and E&P activity, margins are very likely to remain intact for the near to medium term. A point to note is that specifications for all its vessels even the normal tugs/barges are moving up which could translate into higher sales value and hence earnings in the near to medium term.

· Forecast and recommendation is maintained. As the results are within expectations, we are therefore maintaining our forecast for the time being. Currently trading at a lowly 10.3x current year's earnings which is a discount to the peer average of 16x is we believe unjustified. Strong earnings visibility of up to 2010 with order book of RM1.2billion back by a strong management team with hands-on experience are key drivers behind our BUY recommendation. Further rerating catalysts should include higher order book and possibly partnership with large operators to be part of the latter's fleet renewal program. BUY with target price of RM3.48 maintained.





KENANGA INVESTMENT BANK BERHAD (15678-H)