Tuesday 21 July 2015

Coastal: Navigates On Rough Sea

Coastal Contracts is one of the company that I like.

Its business is relatively simple and is easier to understand. 

Although it has 2 divisions namely shipbuilding and vessels chartering, contribution from the latter is negligible.

So, Coastal builds and sells boats/ships, it's that simple.

The performance of Coastal (and its stock price) will depend on how many orders it can get and how well it can grow/protect the profit margin.

The vessels that Coastal build can be used in various fields including Oil & Gas, logistics etc. 

However, since a big chunk of its orders and profit come from customers in O&G sector, Coastal is usually "classified" as an O&G stock.

Thus, it can't escape recent sell-down in O&G stocks amid low crude oil price.

Table below shows Coastal's past financial performance.

Coastal has a great track record, and I think its management team is brilliant.

Since listed in 2003, Coastal produces uninterrupted revenue growth for 11 consecutive years til 2014 apart from a slight RM1.8mil revenue drop in 2013.

However, net profit reached a peak at RM200mil in year 2010 and this record remains to be broken until now.

Why is it so?

In mid-2008, crude oil price fell sharply from its peak of USD140 to below USD50 in just a few months time. Isn't it almost similar to current situation?

Though I rarely read any financial news that time, it's not hard to guess that O&G sector was in deep shxt then.

How did it affect Coastal?

In 2008, Coastal's outstanding orders (unbilled orders) in shipbuilding stood at RM1.7bil, which was even higher than recent high of RM1.5bil.

This showed how robust O&G industry was before it crashed in 2008.

Coastal still manage to secure RM698mil new orders in 2008 but they were mainly in the first 3 quarters.

After that, new orders plunged substantially in which it could only get RM119mil new order in 2009 and then ZERO order in 2010.

The bar chart below shows Coastal's new orders and approximate unbilled orders since FY08 to first half of FY15.

Just like a property developer, if the sales is poor in this year, then we can expect poor financial results in about 2 years time.

Furthermore, competition to fight for orders among shipbuilders was intense at that time thus profit margin was eroded.

This may explain why the revenue still grew but in slower pace and net profit fell from 2010 to 2012.

Crude oil price recovered quite swiftly since 2010 and new orders started to flow in again from year 2011 and peaked in year 2013 with RM1.495bil of new orders in year 2013 alone.

Profit margin also increases due to more orders for higher margin & high-specification offshore support vessels (OSV) used in O&G industry.

Since new order of RM197mil secured from a new Mexico customer in Q1 of FY15, there is still no news of further orders until mid-July 2015.

Though it is good that Coastal can get a new customer, further new orders seem hard to come by as crude oil hit new recent low after news of Iran sanction lift.

Unbilled order has dropped to RM1.01bil and surely it will drop further to around RM700-800mil when Q2 result is announced next month.

Nevertheless, Coastal will have a new stream of income starting from second half of FY15.

I view it positively when Coastal started to venture upstream in O&G sector a couple of years ago.

In Feb 2014, Coastal has secured a charter contract for a Jack-Up Gas Compression Service Unit (JUGCSU) worth RM1.24bil for 8+4 years from a Mexican customer.

Construction of the JUGCSU is on track and set to be delivered in Q3 of 2015.

It is reported that this contract is estimated to deliver profit (pre/post-tax?) of RM30-40mil a year to Coastal.

It will still be a good recurring profit even though it is not that much if compared to FY14's net profit of RM190mil from shipbuilding.

Meanwhile, Coastal is also building 2 Jack-Up Rigs in which it targets to charter to other O&G companies.

However, it can't find a suitor thus the first JU Rig which is to be completed in Q3 of 2015, was sold in April 2015 for RM807mil. Net profit from this sale is not expected to be too significant from RM10mil (Alliance) to RM30mil (Kenanga).

Coastal still intends to secure a charter contract for its second JU Rig pending completion in end of 2015 but it may still sell it like the first rig.

If the rig is kept without generating income, there will be a sum of maintenance and depreciation charge involved which will harm its financial results.

Despite poor sentiment in O&G industry, Coastal's plan is clear.

First, it has a mission to reach RM5bil in market capitalization in medium term. For this to happen, its share price need to be at least RM8.50!

Its current share price and market cap stand at RM2.51 and RM1.35bil respectively.

Secondly, it will continue to look for more opportunities in O&G upstream activities, such as to own and operate jack up drilling rig, mobile offshore production unit or floating production unit/rig.

Coastal has already owned one upstream O&G asset. Can it get another contract for its JU rig by year end?

It is recently reported that it is in talks with several parties for potential merger & acquisition to grow the company inorganically.

Is it the right time to invest in Coastal? I think no one can answer this question confidently.

I learned that crude oil price is deliberately depressed by OPEC to gain more market share by forcing out less efficient US shale oil producers. Can it be done in such a short period of time?

Iran sanction on oil export is going to be lifted. How low the oil price can go after this and how long will it stay low?

Coastal does not pay attractive dividends. It paid 7.2sen dividend for FY14 which is 20% of its net profit.

Even though its share price has dropped to RM2.50 level again, dividend yield is still not that great at 2.8%.

It posted a superb result in FY15Q1, in which both quarterly revenue and net profit hit record high by a huge margin.

This is mainly due to more high margin OSVs (5) delivered in the quarter. Subsequent quarters are not expected to match FY15Q1 performance.

Balance sheet is healthy with plenty of net cash after getting RM207.8mil from private placement in Mac14.

Coastal's share price has fallen more than 50% from its high of RM5.40 in Aug last year to RM2.51 at the moment.

With FY14 EPS of 36.7sen, Coastal is currently traded at PE of merely 6.8x base on share price of RM2.51.

Fair PE for O&G sector should be at least 15x, isn't it?

Anyway, history has told us that Coastal will bounce back along with crude oil price.

It may come back stronger with its ambitious expansion plan.

The question is: When?


  1. Thanks for sharing mate! Good piece of analysis.

  2. Another solid and great writing, thanks BD! Think u can work part time to write analysis for investment companies? :)
    For O&G is this the right time to practice 反向?

    1. Haha, I prefer to write as a "hobby" without any pressure. If it becomes a job, I don't think I'll enjoy it.

      To be a contrarian, it's no wrong to start accumulating slowly now, as nobody can predict the bottom...

  3. Hi BD, thanks for your analysis.
    I try to search in Annual Report, but it is quite difficult to get the complete contract value yearly (new orders & unbilled orders). Mind to share where should I looking for? Thanks.

    1. Hi Chin Hoe, you have to search Coastal's old announcement. It will make announcement under "others" when securing a contract, and latest unbilled orders will be mentioned as well.

    2. Hi BD,
      Thanks, I get it.
      I am looking into Coastal recently since it dropped almost 70% from its peak and found your analysis. From its Q1 2015 results, it has almost RM1 cash in hand vs RM1.66 share price with 4.3% DY, for long term investment it is quite attractive to accumulate it if it drops further.. surprise it jump a lot today!

    3. You're welcomed. I'd say Coastal is really really attractive at RM1.6+ that day. Just feel that low oil price era will last longer than expected...

  4. Thank you for writing & sharing such great article & deep analysis.

    It saved me (as new to this company) a lot of time to understand the business model & historical development of Coastal.

    Keep it up & good health.

    1. You're welcomed. Just sharing what I've learned.

  5. BD,wonder if you would invest in any O&G counter?