April 6, 2011

COASTAL - Coastal Contracts riding high on merger speculation

Stock Name: COASTAL
Company Name: COASTAL CONTRACTS BHD
Research House: AMMB

Coastal Contracts Bhd
(April 6, RM3.50)
Downgrade to hold at RM3.41 with fair value RM3.35
: We downgrade our call on Coastal Contracts Bhd from 'buy' to 'hold' as the surge in share price has reached our unchanged fair value of RM3.35, pegged to an FY11F price-earnings ratio (PER) of six times, based on the group's seven-year average forward PER.

Coastal's share price surged 33 sen or 11% yesterday, following a news report that the group is planning to sell a major stake to a strategic partner as part of its plan to diversify into the fabrication business.

These market rumours are not a surprise, given that our report on Feb 10 this year had already highlighted the potential M&A exercise.

In a reply to Bursa Malaysia, Coastal highlighted that the proposed collaboration with Ramunia Fabricators Sdn Bhd is still under discussion and does not involve the selling of a major stake in Coastal.

The company also emphasised that if the proposed collaboration with Ramunia Fabricators fails to materialise, Coastal would be open to other options with alternative strategic partners to diversify into the offshore structure fabrication business.

Coastal also noted that the board has not formed a firm intention to sell a major stake to any identified party. Our channel checks reveal that the collaboration and M&A negotiations are with various parties and are still at a preliminary stage.

On fundamentals, the group's current order book of RM760 million will last until mid-2012 and it would face an earnings contraction in the absence of fresh vessel sales in FY12F.

Given the huge incoming global delivery of anchor handling tug supply vessels, Coastal's prospects would not appear exciting if a merger fails to materialise.

We have projected flat earnings growth over FY11F/13F, which incorporate fresh orders of RM700 million to RM800 million in FY12F/13F. In our oil and gas sector report on April 5, we highlight that charter rates for anchor handling tug supply vessels are only expected to improve towards end-2012 and platform supply vessels by end-2013.

Hence, we are of the view that the stock is currently fairly valued given that its current PER of six times is at its seven-year average. ' AmResearch, April 5


This article appeared in The Edge Financial Daily, April 7, 2011.

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