Background
Coastal Contract Bhd ('Coastal') is involved in the provision of marine products & services to the shipping, Oil & Gas and commodities industries.
Recent Financial Results
For the QE30/6/2010, Coastal's net profit increased by 11.5% q-o-q or 46.4% y-o-y to RM48.3 million while its turnover was marginally lower than the immediate preceding quarter (QE31/3/2010) but soared by 46% over the previous corresponding quarter (QE30/6/2009). The beetr performance was attributable to better revenue from the Shipbuilding division.
Table: Coastal's last 8 quarterly results
A look at the past 6 years chart of Coastal's top-line & bottom-line shows that the company's growth record has been very impressive & consistent.
Chart 1: Coastal's 24 quarterly results
Financial Position
Coastal's financial position is healthy. As at 30/6/2010, its current ratio stood at 1.8 times while its bank borrowings to shareholders' funds stood at 0.3 time.
Valuation
Coastal (closed at RM2.29 yesterday) is now trading at a PE of 4.3 times its last 4 quarters' EPS of 52.55 sen. At this multiple & strong growth track record, Coastal is deemed a very attractive stock.
Technical Outlook
I have presented below 2 charts of Coastal. Chart 2 is the weekly chart plotted on arithmetic scale. It shows a stock that is trapped with a triangle ('XYZ'), with upside breakout (or, resistance) at RM2.40 & downside breakout (or, support) at RM2.15. Coastal was similarly trapped within a triangle in 2008, where it broke to the downside due to intense selling pressure during the Global Financial Crisis. With no crisis in sight, this bearish is not a likely scenario.
Chart 2: Coastal's weekly chart as at Oct 4, 2010_plotted on linear scale (Source: Tradesignum)
Chart 3 is a weekly chart plotted on logarithmic scale. It shows the stock in an uptrend (S-S2) where the support is at RM2.10. The horizontal support & resistance levels are at RM2.00-2.10 & RM2.40-2.70, respectively.
Chart 3: Coastal's weekly chart as at Oct 4, 2010_plotted on log scale (Source: Tradesignum)
Conclusion
Based on strong & steady financial performance, healthy financial position & attractive valuation, Coastal is a good stock for long-term investment. An upside breakout above RM2.40 could signal the continuation of its prior uptrend.
15 comments:
Hi Alex,
Thanks for the reminder on Coastal. I like this stock too. Used to hold it at RM 1.80 and sold around RM 2.18. If it drops back to RM 2.10 - 2.15, I will buy again. My only problem with this stock is that it's trading quite high above its NTA. Do you know it this is the norm for this type of industry?
Hi, Alex...how is your opinion for Kencana? Will they benefit from ETP and budget2011? thank you :)
Hi AlexP,
Price to book ('PB') is not a very good indicator of value. PB would put a floor price for a stock because if the price goes any lower, one might as well buy up the company & break it up. However, the share price for well-managed companies can be a few times their book value because of the ability of the management to generate higher profit or cashflow or sales. For example, you can compare PE & PB of Mamee & Lonbisc . After a closer study, we know that Lonbisc is very inefficient in the use of its Fixed Assets (go here ).
Hi Harry
Kencana nearly tested its all-time high of RM1.81-1.82 recently. I see this level as a strong resistance which should cap the share price for a while.
For FY2010, Kencana recorded a net profit of RM136 million on turnover of RM1090 million. This gives the company a EPS for FY2010 of about 8.2 sen. At RM1.69, Kencana is trading at a PE of 20.6 times. I would rate it as fully valued.
I am not sure how Kencana & other O&G companies can benefit from ETP and/or budget2011. However, I believe there will be more contracts awarded next year & these companies should see better earnings going forward.
Hi Alex
Would you be concerned on the declining trend of Coastal's revenue?
Coastal revenue has dropped for a consecutive 2 quarters. Could this be a sign that the impressive growth is coming to an end?
Hi Alex,
What do you think of IJM Corp?
Zelan has been selling a lot of IJM shares recently. However, this stock seems very attractive to me.
Would like to hear your point of view regarding this share.
Cheers.
I have the heaviest weighting on Coastal in my portfolio and have been waiting for Coastal to go up till my neck has become as long as that of the giraffe's. Fundamentally Coastal is a A+ stock. Ever wonder why it is in the Forbes' list of best under Billion dollar companies in Asia? I can only think of one reason why Coastal lacks interest, ie its extremely high inventory and long cash conversion cycle of close to two years. This also results in its precarious solvency risk. Alex, or anyone has a concern for this?
Hi Alex,
Could you do a comparison with Coastal vs Maybulk since they are both in shipping too?
Hi JY
I noted the decline in Coastal revenue over the past 2 quarters but I am not too perturbed. There are signs of recovery in the shipbuilding sector as well as new oilfield development in Sabah over the next few years. These should lead to further growth in Coastal's revenue (from Shipbuilding & Vessel Chartering). See Note 17 of Coastal's Explanatory Notes to the Accounts for QE30/6/2010 (Page 12).
Hi K C
I think you have touched on a very relevant point which I failed to elaborate on, which is Coastal's high inventory and long cash conversion cycle. As at 30/6/2010, Coastal's inventory amounted to RM894.7 million, which comprised Finished Goods of RM335.9 million & WIP of RM541.0 million. However, you must deduct the deposits received from Vessels buyers of RM368.5 million which is included in Other Payables. When you compared the net Inventory of RM508.4 million to the turnover for 1H2010 of RM279.8 million, the Inventory collection period of 0.9 year is not so horrifying.
I also read that Coastal's shipbuilding division operates both on a "Built-to-Order" as well as "Built-then-Sell" mode. The later modus operandi involved some risk taking but it leads to lower production cost as the production run is continuous.
Coastal is a very old company from my hometown, Sandakan. The owners are very experienced shipbuilders who know the market well. Nevertheless, I do agree that the amount of funds tied up in its inventory is excessive & the company would well to reduce this inventory & use the funds freed up to improve its dividend payout.
Hi Philip
Coastal & Maybulk are in the shipping business but different end of that business. Coastal is a shipbuilder (with a small exposure to vessel chartering) while Maybulk is a ship-owner (owning shipping bulkers & shipping tankers) as well as acting as a shipping broker.
Maybulk's business is slowly picking but the shipping rates are still very low- thus depressing its bottom-line.
Hi jeremy tan
You are right about Zelan's selling off its IJM shares. However IJM's technical outlook is turning bullish. If it can sustain its upside breakout of the horizontal resistance at RM5.30-5.35, it may test the next resistance at RM5.70-5.80 & then at RM6.00-6.20.
Hi Alex,
Thanks for your explanation on Coastal's high inventory. Now I know that you know the credibility of Coastal's owners (which is the most important to me), and your explanation on the mode of operation of Coastal which could be the reason of its high inventory, and if you are right about this, I believe Coastal has heaps of potential. Beside technical analysis, you are very detailed in financial statement too. I think your blog is probably the best local stock market blog, even though I am not a TA follower. Keep it up.
Thanks Alex for sharing your views on IJM,
in regards to Kencana, I managed to join a friend to have lunch with the CFO of Kencana.
According to him, there are RM600million contracts in the bag already that will be announced at year end.
Judging from the recent MMHE IPO that is 15 times oversubscribed, Kencana should be re rated very soon.
It should be able to cross the RM2 resistance.
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