Key takeaways from COASTAL’s analyst briefing: (i) Potential to convert JUGCSU into MOPU; (ii) Gas processing volume is increasing as planned; (iii) Engaging with luxury hotel operators for Pulau Mabul Resort Project; (iv) Targeting production-related infrastructure projects. We increase the tariff assumption and the maximum processing capacity assumption for Papan Plant, hence raising our FY24-FY26 earnings forecasts by 25.8%-54.7%. Upgrade to Buy with a higher TP of RM2.00/share (previous: RM1.74/share) based on SOP valuation.

Potential Conversion of JUGCSU Into MOPU

Recall that COASTAL’s jack-up gas compression service unit (JUGCSU) was suspended while the discussion for contract extension is ongoing. Management updated that Pemex has revised the options for JUGCSU: (i) to be converted into MOPU with c.40k bpd of production capacity and operate at the existing field for 5 years, or (ii) to operate at another field as JUGCSU for 5-10 years. The latter option requires modification as the water is 20 feet deeper than the current field. We understand that Pemex needs to conclude the discussion with the charterer of JUGCSU by the end of the year and Pemex is inclined for the first option. We are positive on these updates as this suggests high likelihood of contract extension.

Gas Processing Volume Is Increasing as Planned

Recap that Coastal Contracts Bhd (COASTAL) registered a strong 1QFY24 result (41% of ours and 43% of consensus’ full-year forecasts), which we attributed to higher volume of gas processed and EPC profit for Papan Plant. We understand that no EPC revenue was billed in 1QFY24, suggesting that the strong profit for the quarter should be sustainable throughout FY24. The gas processing volume at both Perdiz and Papan Plant continue to ramp up as planned. Papan Plant is currently processing at an average of 340mmscfd (6QFP23: 214mmscfd; 1QFY24: 287mmscfd), close to its maximum capacity of 345mmscfd. Meanwhile, Perdiz Plant’s daily average is hovering at 160mmscfd (6QFP23: 127mmscfd; 1QFY24: 133mmscfd), also close to its capacity of 180mmscfd. Since both plants are expected to reach full capacity soon, Pemex plans to expand Papan Plant’s capacity followed by modification of Perdiz Plant to include LPG recovery capabilities. The expansion plan is expected to finalise by early next year.

Engaging With Luxury Hotel Operators for Pulau Mabul Resort Project

COASTAL has been in discussion with luxury hotel operators to be the operator of Pulau Mabul’s luxury resort. We believe this significantly lowers the execution risk with luxury hotel operators taking the helm of the resort’s operations. The capex for Phase 1 is estimated to be c.RM85mn and the room rate is expected to be more than USD500 per person per night. Considering that phase 1 of the project will take 1-2 years to complete and discussion is still ongoing, we do not expect the Hospitality segment to generate revenue until FY26.

Targeting Production-Related Infrastructure Projects

Management disclosed that COASTAL is targeting 2 medium sized productionrelated infrastructure projects (e.g.: FPSO/MOPU etc) in the Southeast Asia region. The group is bidding for the projects with another experienced partner who will hold the majority stake. We believe the decision is prudent considering that the group will be loaded with cash of nearly RM1bn once the amount due from Mexican JV is repaid by 4QFY24. Having an experienced partner also provides the group with valuable experience in future production-related projects.

Impact

We increase the tariff assumption and the maximum processing capacity assumption for Papan Plant to 345mmscfd (from 300mmscfd), the latest disclosed capacity during the analyst briefing. Following this, we raise our FY24-FY26 earnings forecasts by 25.8%-54.7%.

Valuation

Upgrade to Buy with a higher TP of RM2.00/share (previous: RM1.74/share) based on SOP valuation. COASTAL is expected to secure contract extensions for JUGCSU and capacity expansion contract for Papan Plant, providing additional recurring income to the group.

Source: TA Research - 12 Jun 2024