Tuesday, May 04, 2010

Is Coastal Contracts Better Than Sealink?

Coastal’s FY09 results were above expectations, mainly attributed to the higher number of offshore support vessels (OSV) built - which fetched higher margins than tug boats and barges. Coastal’s FY09 net profit of RM163mil was above expectations, coming in 15% above FY09F earnings of RM141mil and 12% above street estimate of RM145mil. This stemmed from delivery of an additional unit of high-value offshore support vessel, which bumped up progress billings and margins in 4QFY09.






I compared Sealink to Coastal thanks to a reader who has wisely highlighted the major peer-peer comparison (KC):
Sealink / Coastal 09Growth (revenue) -18% / +34% (shows growing business and reach) 09Growth (Profit) -9% / +69% (additional revenue resulting in good margins maintenance, unlike some companies who will sacrifice margins for more revenue) Return of Equity +12% / +36% (both are excellent in deployment of capital) Return of inv cap +8% / +29% (both are excellent in deployment of capital) Times int earned +6.6 / +45 (a comfort buffer) Price/earnings 6.7 / 5.6 (ignored by institutional investors) Price/Book 0.8 / 2.0 Dividend yield 6% / 1.2%

KC said: "Hence except for its price/Book and Dividend yield, Coastal is way ahead in its profitability and attractiveness as an investment. Coastal may need to conserve cash for its profitable operations. Earnings may be more important than assets." What KC said is true and correct. Sealink is good, and may be a value trap if investors were to focus too strongly on its P/Book ratio of just 0.8x compared to Coastal's 2.0x. The higher valuation accorded to Coastal has a lot to do with its margings, earnings and book orders. On the second point of it being a lower yielding stock than Sealink, again KC is absolutely spot on. You want to be with a company that is reinvesting for much higher returns - which in this case, investors should not be too perturbed about Coastal's low dividend yield.




I still think Sealink is undervalued, but probably not as much as Coastal. If I think Sealink is worth 80 sen, then Coastal is worth at least RM3.40. This puts Sealink on a 21% upside, while Coastal has a 33% upside on a 6 month view.

Updated: April 14, 2010


Ivory Asia Sdn. Bhd.

17.99%


Ivory Asia Sdn. Bhd.

14.15%


Lembaga Tabung Haji (TH)

8.44%


Fong Thau PANG

6.72%


Rickoh Corporation Sdn. Bhd.

6.06%


Fong Thau PANG

6%


Fong Thau PANG

5.44%

The company’s strength lies in its strong orderbook, which has helped it sustain robust numbers quarter after quarter.To date, they should have more than RM1.3bn. Coastal’s FY09 net profit surged 68% YoY to RM163mil due to:
- Delivery of higher value vessels in FY09 compared to lower proportion of lower value tugs and barges in the previous year. This subsequently caused a 6-percentage-point increase in shipbuilding/repair EBIT margin to 32%. Given the strong performance so far, management continues to be confident of registering such margins over the next two years as most of the group’s shipbuilding, thus making sure that costs have been locked-in.
- Higher utilisation of the group’s charter fleet of 24 vessels, which caused charter revenues to rise 8%,stock currently trades at a bargain FY09F PE of only 4x - a 60% discount to the local oil
& gas industry’s 10x. This is unjustified given Coastal’s sizeable order book of RM1.3bil, which will last for another two years. The group is currently building over 100 vessels - under different stages of construction - with a potential value of RM2bil. Half of these vessels have been sold with the remaining units comprising of lower priced tugs and barges.



Since 31 December 2008, Coastal’s inventories have risen by 28% to RM781mil. While this translates to a high stock holding period of 609 days, this appears to be a norm for the shipbuilding industry. Management affirms that this is not alarming as working capital of the group is rising in tandem with construction progress of its huge order book. There was a rise by RM523mil in deposits from customers - being progress payment for vessel construction. Coastal has also received payment of RM82mil from trade receivables after 4QFY09.


It should at least make RM200m net profit in 2010, which translates into a net EPS of 56 sen. IT is just trading at a ridiculously low PER.


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.

3 comments:

K C said...

Hi Dali,
I am absolutely delighted with your fast response to my comments, even with a detail writeup. I liked Coastal as an investment very much but I did have strong reservation on 2 points, one is its extremely high inventory. Its inventory turnover for 2009 is 612 days (Improved from 638 days). Sealink is even worse, its inventory turnover deteriorates from 428 to 677 days. But I am quite convinced by your response in your new article that it may be the nature of this business. The second concern is its surprising low cash flows from operations. Although its profit is 35%, its CFO is only about 8% of revenue. Past 5 years CFO are also very erratic. Hopefully this is again the nature of its business. There are a lot more pluses than concerns for Coastal actually.
Coming back to Sealink, I have a lot more reservations. Sealink has a bloated balance sheet which can be very risky in case of sudden downturn. Its return of invested capital of only 8% in this highly risky business is to me not worth. Even though its financial leverage is two times, its ROE is only 12%, an evidence of its low return of assets. This ROE is below my expectation of minimum 15%. I think there are a lot more other better hidden gems around.
Cheers.

Superman said...

Sealink is really not in a very good shape now but Coastal is still doing ok for the time being. But the unsold vessels are still piling up in the yards...

K C said...

Superman,
I thought those vessels under construction in the yard were by contracts, meaning that they were ordered by clients and will be delivered to them upon completion. Coastal does have a very high inventory and I hope they are not unsold vessels. That will change the assessment of Coastal completely. Could you substantiate and confirm your statement?