Review

• Coastal Contracts Berhad’s (COASTAL) 9MFY24 core profit of RM61.7mn accounted for 46% of ours and 42% of consensus’ full-year forecasts respectively. The results missed expectation due to weaker-than-expected performance in Vessel Chartering and the absence of revenue from TC7, which we had assumed that there will be an extension of contract with no lag.

• QoQ: COASTAL’s PBT declined significantly, swinging from RM21.8mn to an LBT of RM46.2mn. This was driven by a 55.0% QoQ drop in vessel chartering revenue, attributed to the liftboat being off-hire for scheduled maintenance from mid-June 2024 to late August 2024. Additionally, there was no revenue contribution from the Shipbuilding and Ship Repair division during the period.

• YoY: Similarly to QoQ, PBT plunged from PBT of RM87.9mn to LBT of RM46.2mn mainly due to weaker contributions from Vessel Chartering and the absence of revenue from other business segments.

Impact

• We trimmed our FY24/FY25/FY26 earnings forecasts by 33.0%/48.0%/29.6% respectively as we reflect 3QFY24 earnings and the increased uncertainty surrounding the renewal of the TC7 contract. Pending further clarity from the upcoming analyst briefing and the company’s ability to secure new income streams to offset expiring contracts, additional adjustments may follow.

Outlook

• PETRONAS has outlined a total CAPEX range of RM50bn to RM60bn annually and RM300bn over the next five years. COASTAL’s robust balance sheet positions the group well to capitalize on growth opportunities during this industry upcycle.

• The TC7 contract has already expired with no revenue recognized, indicating no extension or continuation. The group’s main earning contributor beyond 2025 is only Papan plant. While discussions for a 5-year contract extension with Pemex, including adding LPG processing capabilities, are ongoing, delays have been noted. COASTAL faces an urgent need to diversify its income streams to mitigate the impact of expiring contracts.

• Recap COASTAL has been in discussion with luxury hotel operators to be the operator of Pulau Mabul’s luxury resort. 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.

Valuation

• Following the change in our earnings forecasts, we lower our TP to RM1.63/share (previous RM1.89/share) based on sum-of-parts valuation. Downgrade from Buy to Hold. We view renewal of contracts for TC7 and also new income streams secured as key rerating catalyst for the stock.

Source: TA Research - 28 Nov 2024