COASTAL - Still a potential M&A target (OSK)

Although the flow of M&A news has come to a trickle, especially since the European debt crisis worsened, we still believe that the possibility of Coastal being an M&A target will resurface in the coming months. Our view is premised on 3 factors: i) the stock’s valuation is attractive, which increases Coastal’s appeal as a takeover target, ii) it has a strategic asset in its 100-acre shipbuilding yard, which can be converted into an O&G facility for fabrication or even to carry out repair and maintenance jobs, and iii) this yard is located in Sandakan, Sabah where most of the deepwater activities would be centered in the future.

A deepwater story for 2013. We believe that 2012 would still be a year for marginal oilfields but looking beyond that, we see the theme for 2013 to be one of deepwater activities, especially with the Gemusut deepwater O&G field expected to be ready for production by then. By that time, the Malikai O&G field should also be set for production, with most of these activities centered on Sabah state. This will provide the impetus to convert Coastal’s yard into a fabrication or repair and maintenance yard as this makes great business sense from the timeliness and cost viewpoint.

Maintain Buy. Our fair value for Coastal remains unchanged at RM3.00, based on the existing PER of 7x FY12 earnings.