KUCHING: Coastal Contracts Bhd’s (Coastal) reported venture into potential mergers and acquisitions (M&As) is not an entirely surprising development to analysts.
According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), Coastal has been reported by media to be in preliminary talks with several parties to pursue inorganic growth through mergers and acquisitions.
Kenanga Research noted that the group is believed to be looking at vertical integration, horizontal integration or even diversification.
It further noted that timelines of the discussions, however, are not disclosed at the moment.
“It is not entirely a surprise to us due to the favorable market timing for acquisitions under the current market scenario as valuations of the sector is significantly cheaper compared to a year ago,” the research arm said.
However, Kenanga Research would still prefer the acquisition to be either horizontal or vertical as the oil and gas (O&G) sector is Coastal’s forte.
Diversification into another sector would give rise to higher uncertainty to Coastal’s business direction, in the research arm’s opinion, and it could be costly for the group from management’s perspective.
Kenanga Research noted that funding would not be an issue for Coastal given the group’s RM493.3 million war chest in its balance sheet as of the first quarter of 2015 (1Q15).
“We also do not discount the possibility of debt funding in the event of M&A given its relatively low net gearing at 0.1-fold versus industry average of 0.4-fold,” the research arm said.
Kenanga Research has imputed four months earnings contribution from the jack-up gas rig chartered on long-term contract to Pemex this year.
The research arm noted that Coastal is awaiting its second high-specification jack-up rigs due the second half of 2015 (2H15), which has yet to secure a charter contract at the moment.
“However, we understand that management is working very hard to close some deals soon.
“If no contract is secured, the management will elect to dispose the rig pre-actual delivery to reduce their risk exposure,” it said.
On a side note, the research arm recalled on April 14, 2015, the group has announced sale of its first Jack up Drilling unit, which is profit making, freeing them from high asset costs upon delivery amid weak drilling market.
All in, Kenanga Research has maintained its forecasts for now, in addition to its ‘outperform’ rating on Coastal.