KUCHING: Analysts negatively percieve Coastal Contracts Bhd’s (Coastal) news of its memorandum of understanding (MOU) for a proposed Indonesian joint-venture has been left unconsummated.
The announcement was made in a recent filling with Bursa Malaysia where Coastal detailed that the expiration of the MOU with PT Jaya Samudra Karunia Internasional (JSK), PT Jaya Samudra Karunia Gas (JSK Gas), and Yudha Kurnia Tanos, expired on October 28.
The research arm of Kenanga Investment Bank Bhd (Kenanaga Research) viewed this MOU expiration negatively as it believes that this deal was strategic for Coastal in the penetration of the growing Indonesian liquefied natural gas (LNG) market while establishing a new income stream which would help Coatsal reduce reliance on its slowing shipbuilding business.
The deal was mainly viewed as strategic due to the Floating Regasification Unit (FRU) owned by JSK through its subsidiaries and the awarded 20-year firm charter contract with an extension option of 13 years to provide a floating storage unit (FSU) to receive LNG from the LNG carrier on a scheduled basis.
Due to this, Coastal’s order book replenishment risk persists as it stands at RM2.3 billion with Rm836 million attributable to OSV fabrication spanning until calender year 2017 CY17 while the remaining RM1.5 billion attributable to the JUGSU charter contract.
Addition ally, with increased requests from Coastal clients to defer vessel delivery during the quarter, this will only add to further weakness and uncertainty on its shipbuilding segment in view of prolonged vessel oversupply issue resulting from low offshore activities.
“We believe Coastal most probably will allow these deferrals without any substantial penalty in order to preserve client relationships,” opined Kenanga Research.
Despite this, the research arm notes that Coastal’s healthy balance sheet with a cash pile of RM529 million offsets some of these negative impacts as it allows Coastal the ability to continue searching for new opportunities in order to secure a new source of income which will serve as a strong factor to entice other players to collaborate with Coastal.
With the expiration of the MOU, the research arm has decided to cut their financial year 2017 to 2018 estimated (FY17-18E) earnings by 4 per cent each financial year after excluding earnings estimates from both the ongoing FRU contraction as well as impending contribution from the FSU contract.
Following this, the research arm has also lowered their target price for Coastal to RM1.46 from RM1.52 pegged to CY17 price earnings ratio (PER) of 8 fold.
“Note that Coastal is releasing its first quarter 2017 (1Q17) results end of the month and we do not discount the possibility of further earnings risk arising from weaker than expected vessel deliveries” added the research arm.