KUALA LUMPUR: Coastal Contracts Bhd's management sees earnings growth trajectory to rebound with the commencement of the Perdiz and Papan gas plants in Mexico, said Affin Hwang Capital.
The firm said the gas processing business currently made up all of Coastal Contracts' profit.
"All of the gas projects have a reputable end client, Pemex which is Mexico's national oil company. This is through partnering with Nuvoil, a Mexican exploration and production company, with which Coastal has a long working relationship," Affin Hwang said in a report today.
It added that the prolonged low client capital expenditure spending since the 2014 oil price down cycle had crushed the demand for global offshore support vessels new builds, dragging Coastal Contracts' earnings over the past few years.
"However, management sees earnings growth trajectory back on a solid footing with the commencement of the Perdiz and soon Papan gas plants."
Affin Hwang said Coastal Contracts' recent third quarter (3Q) financial year 2022 (FY22) results were robust, with a RM38 million core net profit nearly matching full-year FY21 profit of RM40 million.
The company's jack-up gas compression service unit is currently the main revenue contributor, generating RM130 million annual revenue and RM90 million free cash flow.
Subsequently, Coastal Contracts was awarded a further two onshore gas processing plants for Pemex's Ixachi gas field in Mexico.
The 50 per cent-owned Perdiz gas sweetening plant has started contributing since Q1 FY22 for a concession period of 32 months.
In December last year, the consortium secured its second gas conditioning plant, Papan, worth RM4.5 billion.
"Near-term earnings would be driven by engineering, procurement, construction and commissioning execution, with construction targeted to complete by end Q3 CY22, and will generate a recurring income for the next 10 years, under a take-or-pay agreement upon completion," Affin Hwang said.
It added that Coastal Contracts had RM128 million of net cash as at end-March, allowing it to leverage for future project growth.
Based on the Bloomberg consensus estimate, the stock is trading at a 7.5 times FY23E price-to-earnings multiple.
This is at a discount to the oil and gas small-cap sector's valuation, and its closest comparable listed peers, trading at an average 12 times forward price-to-earnings ratio.