Coastal- top-line & bottom-line dropped on lower sales of vessels

Results Update

For QE30/9/2011, Coastal's net profit dropped by 21% q-o-q or 32% y-o-y to RM37 million while its turnover dropped by 53% q-o-q or 43% y-o-y to RM110 million. The drop in the bottom-line & top-line was due to lower number of vessels delivered of 5 units compared to 8 units in 2Q2011 or 7 units in 3Q2010.


Table 1: Coastal's last 8 quarterly results



Chart 1: Coastal's last 28 quarterly results (including profit margin)

Financial position

Coastal's financial position is always weighed down by concern about its high inventory level, which is a product of its rolling vessels building programme. In this programme, the company builds standard vessels for its inventory in addition to building vessels to customers' specification. This resulted in the carrying of higher inventory level. I have reduced the Balance Sheets for 30/9/2011 & 31/12/2010 to a simplified version below:


Table 2: Coastal's Simplified Balance Sheets as at 30/9/2011 & 31/12/2010

If we assumed that all finished vessels ordered are delivered once completed, then the Finished Goods (vessels) in the Inventory are the standard vessels awaiting for sale. If we assumed that Advance Payment from Buyers is equivalent to the value of work-in-progress ('WIP') done on vessels ordered by buyers, then the balance of the WIP is for standard vessels under construction. Based on these assumptions, we can make the following conclusions:
1) the bulk of the WIP is for vessels constructed to buyers' orders.; and
2) 52-58% of equity is tied down in standard vessels (both WIP & Finished Goods).

With the low leverage and high cash & bank balances, Coastal's financial position is considered very sound. The only risk is the risk of obsolescence of the Finished Goods & that is capped at 58% of equity.

Valuation

Coastal (closed at RM1.85 today) is now trading at a PE of 4.6 times (based on last 4 quarters' EPS of 40.37 sen). At this PE multiple, Coastal is deemed very attractive.

Technical Outlook

Coastal is in an uptrend line with support at RM1.70-1.80. Thereafter, it may find support at the horizontal line RM1.60.


Chart 2; Coastal's weekly chart as at Nov 21, 2011 (Source: Tradesignum)

Conclusion

Based on attractive valuation & positive technical outlook, Coastal could be a good stock for long-term investment.