• Upgrade to BUY from Neutral, new MYR1.85 TP from MYR1.89, 20% upside. Following updates to our ESG scoresheet for the energy sector stocks under coverage, we pare down Coastal Contracts’ ESG score to 2.6 from 2.7, and adjust our TP accordingly. This revision primarily reflects a drop in its score under the “E” (Environmental) pillar, as COCO lags behind peers due to limited disclosures and transparency on emissions metrics.

• The positives. The group remains committed to its long-term sustainability objectives and has shown focus in several strategic areas. It is channeling investments into production-related infrastructure projects, with an emphasis on natural gas, which is seen as a more sustainable alternative among fossil fuels. Additionally, COCO is gradually disposing of OSVs and working to establish a medium- to long-term strategy to diversify into the renewable energy (RE) sector, in accordance with its broader climate transition roadmap to achieve net-zero emissions by 2050. These initiatives reflect the group’s proactive stance towards reducing its carbon footprint in line with its sustainability goals.

• Areas for improvement. Despite these positive steps, there is room for COCO to enhance its ESG profile, particularly in emissions reporting. It has yet to disclose emissions fully, including Scope 1, 2, and 3 data. Enhanced transparency on the impact of RE investments, third-party verification of emissions data, and more accessible ESG metrics in public reports would improve its alignment with global standards and build stakeholder confidence in its sustainability initiatives.

• ESG score update. We trim COCO’s ESG score to 2.6 from 2.7, primarily reflecting challenges within the environmental pillar. This downgrade is driven by the lack of comprehensive emissions disclosures across the Scope 1, 2, and 3 classifications, which places COCO behind industry peers which have begun to disclose their full emissions data.

• Upgrade to BUY. While our ESG score has been revised downwards, the recent decline in COCO’s share price presents an attractive entry point for investors – the stock is trading at 4.6x FY25F P/E (below -2SD from its 5-year mean). We also foresee positive catalysts ahead, with the jack-up gas compression service unit or JUGCSU contract extension discussions expected to conclude by the year-end. Additionally, increased gas production at the Ixachi field should keep its recurring income profile in sturdy shape, further supporting the stock's long-term appeal. 

Source: RHB Securities Research - 18 Nov 2024