Coastal Contracts Bhd
(April 8, RM3.43)
Maintain buy at RM3.47 with target price of RM4.85: We understand that Coastal is in talks with a few parties, including some international players, on either taking up a strategic stake in the company or forming a JV company. The company did not disclose any names. According to The Edge weekly, these parties are Ramunia Holdings Bhd and Alam Maritim Resources Bhd, which we believe is plausible. Ramunia's recent acquisition of Oilcorp Bhd's fabrication yard shows us that it is not ready to exit the oil and gas (O&G) industry. As such, we would not be surprised if Ramunia decided to establish a presence in Sabah, the hub of most up-and-coming deepwater activities, for logistics and commercial purposes. It would also not be inconceivable for Alam Maritim to be eyeing Coastal to enhance its presence in Sabah. In addition, the company intends to target the Sabah market, having signed an MoU with Yayasan Sabah Shipping Sdn Bhd in October 2010.

Despite this impressive performance, we believe there is further upside for the stock as the current price is still attractive at a price-earnings ratio (PER) of five to six times, compared with the O&G sector's 12 to 14 times. If the company is able to move up the value chain and venture into the fabrication business, investors should be comparing Coastal with its listed peers Kencana Petroleum Bhd and Malaysia Marine and Heavy Engineering Sdn Bhd, both of which are trading at a PER of 21 to 27 times. We believe that valuing Costal at a PER of eight times is fair, as this comprises only about 30% of its two bigger peers' valuations, yet provides a 40% upside from its share price.

We maintain our 'buy' call. Now that Coastal has gained visibility among investors, we believe its share price should trade higher than the current five to six times PER valuation. We strongly believe that it has the makings of an M&A target, either through a strategic investment, a JV or even a takeover, if the offer price is attractive enough for the management. All eyes are now on a potential new business to be injected into the company rather than on its core shipbuilding business. Hence, our target price for the company remains unchanged at RM4.85, based on a PER of eight times FY11 earnings per share. ' OSK Research, April 8


This article appeared in The Edge Financial Daily, April 11, 2011.