Coastal Contracts earnings visibility set to get a lift

PETALING JAYA: Coastal Contracts Bhd’s earnings visibility is expected to be boosted by contract extensions in key assets and new project opportunities moving forward, says TA Research.

The research house noted some of the key takeaways from its recent meeting with Coastal Contract’s management include the collection of payment for its Mexico-based Papan EMC’S engineering, procurement and construction (EPC) contract is expected to accelerate and amounting to Us$196mil (Rm911mil) in the first half of financial year 2023.

Another important takeaway is on the group’s current ongoing bids for Petroleos Mexicanos (Pemex) projects that include an oil processing plant as well as a gas conditioning plant at Ixachi.

The Ixachi onshore gas field will require three new gas conditioning plants when it hits peak production by 2026.

During this period, Ixachi’s gas production is forecast to reach as high as 1,100 million standard cubic feet per day (mmscfd).

This exceeds existing and upcoming processing capacity at the fields of Papan EMC and Perdiz at 480 mmscfd.

On the back of this, TA Research noted Coastal Contracts is eagerly anticipating the upcoming tenders, which are expected to open for bidding by end-2022 or early2023.

“The management believes the new plant will likely be the field’s largest to-date, surpassing Papan EMC’S size of 300 mmscfd,” it added.

On a separate note, Coastal has also submitted a bid to develop an oil processing plant for Pemex.

“However, the management is tight-lipped on details for this new project,” said the research house.

Meanwhile, the shareholder’s loan extended by Coastal to fund Perdiz’s construction may be settled by October 2022 on the back of strong operating cash flows from the plant, TA Research noted.

At this juncture, the research house said Coastal Contracts’ management preferred mode of funding for new upcoming projects is via debt financing.

“The management is comfortable to leverage up to net gearing of 0.5 times to 0.6 times from 0.2 times currently,” said TA Research.

Given the robust outlook for Coastal Contracts, the research house has also maintained its earnings estimates.

It has reiterated a “buy” recommendation on the stock with a target price (TP) of RM2.60 based on sum-of-parts valuation.

“Our TP implies a modest calendar year 2023 price-to-earnings ratio of 11.2 times,” it added.

The research house believes that the valuations and earnings are primed for re-rating if “the group secures another major project.”

The potentials for the latter in the near-to-medium term include a third gas conditioning plant at Ixachi, as well as the new jack-up gas compression service unit or new oil processing plant for Pemex.