Timing To Reload On Coastal Contracts Couldn't Be Better

Been a long time friend of Coastal Contracts. Investors would have been sitting on good gains if they had this stock for more than 6 months. For those who are more short term oriented, the timing to buy could not be better with the announcement of the ex-date for the bonus and free warrant issues. Going through that exercise should unlock at least another 10%-15% upside within the next 2-3 weeks.



Last Friday, Coastal announced the ex-date for its 1-for-3 bonus issue which will fall on 14 July 2011. On this date, there will be about an additional 120.8m new shares being listed on the Bursa Malaysia which will total up its number of shares to 483.2m. Bonus issue also comes with free warrant. This free warrant will be issued on the basis of 1 warrant for every 8 shares held after bonus issue. Hence, to simplify things, if an investor holds about 6 Coastal’s shares before the ex date, he will get additional 2 new Coastal shares and 1 free warrant.

OSK: Coastal’s share price would be adjusted to RM2.67 on an ex-basis based on Friday’s closing while our fair value for Coastal would be adjusted to RM3.86 from RM5.15 now based on existing PER of 8x FY12 EPS as we incorporate in these additional bonus shares.

Coastal Contracts specialises in the construction of Offshore Support Vessels (OSVs), notably those in the 5,000BHP range. The group has grown from a two-boat shipper to a large-scale vessel manufacturer with RM760m outstanding contract orders that will last till 2Q12.



Product Range / Products Capacity
Anchor Handling Tug Supply (AHTS) 5,150-10,728 BHP
Utility Support Vessel 2,400-3,500 BHP
ROV Support/Maintenance Vessel 5,000BHP
Offshore Landing Craft 1,200-1,262 BHP
Maintenance/Support Vessel 3,500 BHP
Accommodation Barge 300 Men
Tug Boat 1,200-3,200 BHP
Oil Barge 3,750 M8
Dumb Barge 805-11,500 MT
Landing Craft 600-1,200 BHP
Source: Company, DBS Vickers

Growth prospects: Sustainable high crude oil prices, implementation of O&G NKEAs and the entry of strategic partners in its fabrication venture would increase demand for OSVs and breathe life into its oil rig component fabrication segment. Consistent net profit margins and strategically placed shipyard. A longstanding track record in maintaining c. 30% net profit margins in its vessel construction business and its strategically placed shipyard near Sabah’s marginal oil fields put Coastal in a good position to capitalise on a burgeoning East Malaysian O&G sector.



O&G-heavy clientele: 80% of Coastal’s customer base comprises service operators in the Oil & Gas sector, and the rest logistics service providers, navy and shipping agents. Typical orders for sectors other than Oil & Gas have a 6-8 month period between order and delivery, with the majority from returning customers. Notable customers in the O&G sector include Tidewater Group, Swiber Group and Maridive Offshore Projects S.A.E. The majority of Coastal’s vessel buyers are predominantly foreign companies from USA, Egypt, Singapore and Indonesia. Major customers for its repair and maintenance services include the Royal Malaysian Navy, Marine Police and Malaysian Maritime Enforcement agent. Its ship repair segment is a localised industry and makes marginal revenue contributions.

Coastal Contracts owns a 90-acre shipyard in Sandakan, Sabah, where 30-35% of its vessels are constructed. Of this, 52 acres are used for its potential fabrication venture, while 38 acres are for ship building. The remaining 65-70% of its vessel orders is outsourced to 10 third party Chinese shipyards in South and Central China. The group provides ship specifications and major components to install on the vessels. To ensure optimal product quality, the group employs dedicated engineers on-site to manage and oversee vessel construction. With most of its sales conducted by its offshore subsidiaries Coastal Offshore (Labuan), coupled with a predominantly international client base, Coastal is able to minimise taxes levied on its sales.



Potential stock price catalysts: Possible MoUs worth RM300- 400m coming to fruition, of which RM100m is close to realisation. Other potential catalysts include further implementation of ETP O&G projects, order clinches in 2H11 and new partner to replace Ramunia. There is also the high possibility of M&A as the company's size and industry expertise both lend itself to being a very attractive acquisition target, in particular with its "low pricing".


NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.