Earnings downgrade for Coastal Contracts on slow vessel delivery
KUCHING: Researchers with Kenanga Investment Bank Bhd (Kenanga Research) downgraded their financial years 2017 (FY17) and 2018 estimate earnings expectations for Coastal Contracts Bhd (Coastal Contracts) yesterday following disappointing results for its first quarter (1QFY17).
In a research note, the firm said it slashed FY17 and FY18E earnings by 66 to 43 per cent in view of slower vessel deliveries.
“First quarter of FY18 results was disappointing with core net profit of RM3.1 million accounting only three per cent of both our and street’s estimates,” it said.
“The disappointment was largely due to weaker- thanexpected vessel deliveries. No dividend was declared as expected.”
This came as the group saw only one vessel being delivered in 1Q17.
“Earnings in 1Q17 plunged 77 per cent in tandem with a 62 per cent fall in revenue, no thanks to lower numbers of vessels sold of one unit but was partially offset by improvement in vessel chartering segment,” it added.
“Note that its shipbuilding and repair division slipped into losses of RM11.2 million in this quarter, dragged by the stubbornly high fixed cost amidst weak revenue.”
Year on year, Coastal Contracts’ core earnings dropped 93 per cent from RM45.2 million in 3Q15 largely attributable to similar reason – lower vessel deliveries.
“Having said that, the earnings were partially offset by maiden contribution from its jack- up gas compression service unit (JUGCSU) in 2016. Recall that the group recorded its first jack-up rig sale in 3Q16, lifting its quarterly revenue to an unusually high level of RM921.2 million.”
The silver lining in Coastal Contracts’ cap is its new joint venture which Kenanga Research said will diversify the firm’s business risk.
Earlier this month, the group entered into a joint- venture agreement ( JV) with Polaris Holdings SARL to set up CN Energy Holdings Pte Ltd to pursue opportunities in offshore gas treatment projects worldwide for S$5,000 or RM15,200.
“We believe the proposed JV is positive in establishing a recurring income stream which will help reduce reliance on its weakening shipbuilding business,” it said.
“However, the offshore gas treatment project tender could be competitive given that limited jobs opportunities amidst prolonged weak oil prices.
“We are guided that the JUGCSU is finally on hire after completing the commissioning stage in the Gulf of Mexico for PEMEX in August and has started receiving payments from client since October.
“Despite having long- term recurring income from vessel chartering, we believe Coastal Contracts is still facing order book replenishment risk and vessel delivery risk as clients may opt to defer their orders.
“We slashed our FY17- 18E earnings by 66 to 43 per cent after factoring in lower gross margins on shipbuilding segment following lower vessel delivery assumption in view of higher chances of vessel deferral.
“Post-earnings adjustment, we decided to switch our valuation model to price- to- book value from price earnings ratio due to the significant deterioration of near-term earnings prospect. This is also consistent with our sector valuation metric during challenging times.
“Our target price is now reduced to RM1.32 per share.”