KUALA LUMPUR: Coastal Contracts Bhd, which invested over RM10 million to upgrade its fabrication yard in Sandakan, Sabah to undertake larger offshore structures for the oil & gas (O&G) industry, expects to work on its first project by year-end.

Its executive chairman Ng Chin Heng said the company, which has a shipbuilding order book of RM1.1 billion, sees the fabrication business as necessary as oil majors venture into deeper waters to explore for oil.

“We endeavour to translate our success in the shipbuilding sector to the offshore O&G fabrication arena,” he said in an email interview with The Edge Financial Daily.

The company has been delivering an average of 30 offshore supply (OSVs) and marine transport vessels per year over the past three years.

Ng expects to see a pickup in new shipbuilding contracts, especially for OSVs, given the stronger fundamentals in the offshore O&G industry and international trade, supported by the gradual recovery in the global economy and capital markets.

“If everything works out smoothly, we could be working on our maiden (fabrication) project before year-end,” he said.

Ng said Coastal Contracts had invested over RM10 million to upgrade its Sandakan fabrication yard, covering 52 acres (20.8ha), as it sought to obtain pre-qualification from Petroliam Nasional Bhd (Petronas) for O&G jobs.

“Upon completion of current upgrading works at the yard, it will have the capacity to undertake the fabrication of offshore structures up to 2,500 tonnes,” he said. If needed, it could double its capacity to 5,000 tonnes.

Ng also said Coastal Contracts was consulting Ramunia Holdings Bhd on pre-qualification for Petronas jobs as the latter had more experience while Coastal Contracts’ track record was mainly in marine structures and shipbuilding.
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“We are in the midst of putting together the building blocks and risk management protocols to fast-track the realisation of this business expansion strategy,” he said.

The company’s unit Pleasant Engineering Sdn Bhd had earlier signed a memorandum of understanding with Ramunia to jointly bid for new O&G projects.

As for shipbuilding, Ng said Coastal Contracts had delivered eight vessels in the past six months. It had about RM1.1 billion in its order book as at March 31. The group was also focusing on building larger OSVs measuring 78 metres in length.

“We are seeing a fundamental shift of the shipbuilding trend towards larger, more powerful and more sophisticated tonnage, and consequently far pricier OSVs, as the offshore O&G activities move to harsher environment at greater depths,” Ng said.

He said Coastal Contracts targeted to move up the OSV value chain further, if there was greater demand.

On its ship chartering business, Ng said protracted low prices of commodities would definitely have a negative impact on the segment.

However, he added that as the bulk of its earnings came from its shipbuilding division, any decline in shipping activities would not significantly effect its financial performance. Ship chartering only contributed 7% to its total earnings.

“Assuming half of this is wiped out, the group will still be on a strong footing,” he added.

For the quarter ended March 31, 2010 (1QFY10), Coastal Contracts reported a net profit of RM43.3 million on the back of RM141.14 million in revenue. Net profit grew 55.9% from RM27.76 million a year ago, while revenue surged 76% from RM80.16 million. Earnings per share rose to 11.95 sen from 7.87 sen.

Its stronger earnings were due to more vessels delivered compared with a year ago.

OSK Research and AmResearch both maintained their buy rating on the stock, with both research houses saying its 1QFY10 results were within expectations.

OSK expects Coastal Contracts to secure new shipbuilding orders in the second half of 2010, especially from Petronas and its production-sharing contractors (PSC).

“We believe that once the existing unutilised OSVs are more than 50% taken up, vessel owners will start investing in newbuilds as it takes about one to two years to get a vessel ready, depending on specification and size,” it added.

OSK raised its target price for Coastal Contracts to RM3.77 from RM3.63, based on the existing price-earnings ratio (PER) of eight times as it rolls forward to FY2011 earnings.

AmResearch said Coastal Contracts’ shares were trading at a bargain to FY2010 forecast PER of only four times, a 60% discount to the local O&G industry average of 10 times.

The research house maintained a fair value of RM3.15 per share, based on a FY10 forecast target PER of six times at parity to the group’s three-year rolling forward PER average.

“We expect the stock to be re-rated on news flow of fresh vessel orders in tandem with the recovery in O&G capital expenditures around the region,” it added.