KUALA LUMPUR (March 15): Shares of Coastal Contracts Bhd shed as much as 4.94% or eight sen to RM1.54 in early trade, amid scepticism towards its foray into tourism through the acquisition of a resort project in Pulau Mabul, Sabah.

Coastal Contracts announced it is investing RM19.89 million for an 82% stake in Jewel Mabul Development Sdn Bhd (JOMD), the owner of a resort project in Pulau Mabul.

It will inject RM50 million in the form of share subscription in JOMD to develop phase one of the resort project, the announcement on Thursday said.

The acquisition came at a time when analysts have started to flag expiring contracts in the company, whose core segments include engineering and construction of gas processing plants, and charter of jack-up gas compression service unit (JUGCSU).

When contacted, Rakuten Trade equity research vice president Thong Pak Leng cautioned that this new venture business falls outside Coastal Contracts' core operations, raising concerns over the potential earnings impact if the venture fails.

He emphasised that the acquired company is currently operating at a loss, which would potentially have an adverse impact on Coastal Contracts' earnings going forward.

"The acquired company is currently operating at a loss. Unless the management successfully implements a turnaround strategy, it could adversely affect the company's earnings,” Thong explained. 

Echoing similar sentiments, TA Securities expressed “mildly negative” on Coastal Contracts’ acquisition. 

While acknowledging Coastal Contracts’ attempt to diversify its revenue streams, the research firm took a cautious stance due to Coastal Contracts' lack of sector experience and associated execution risks.

However, there was no change to TA Securities’ earnings forecasts pending an analyst briefing on March 20, where more details would be shared on the expected construction timeline and capacity of phase one of the resort development.

TA Securities maintained its “hold” rating on Coastal Contracts but revised its target price downward to RM1.76 from RM1.85 previously, citing concerns about the sustainability of the group’s earnings as some of its contracts would gradually expire without replacement.

Coastal Contracts is also involved in vessel chartering, and shipbuilding and repairing, which was lossmaking in its latest quarter.

As at end-Dec 2023, Coastal Contracts' cash and bank balance stood at RM170.07 million with bank borrowings of RM55.69 million, its latest financial statement showed.

In its 12 months ended March 2023, JOMD recorded a net loss of RM487,000, while its net assets totalled RM4.65 million.

At the time of writing, Coastal Contracts’ shares were still down seven sen or 4.32% at RM1.55, giving it a market capitalisation of RM850 million. Since the start of the year, the counter is down 6%.