Boustead Heavy Industries - Earnings to turn around from Gen2 naval job BUY

• We maintain BUY on Boustead Heavy Industries Corp (BHIC), with an unchanged fair value of RM4.90/share, based on a 20% discount to our sum-of-parts (SOP) value of RM6.12/share. It implies an FY12F PE of 11x – a 35%discount to Singapore Technologies Engineering Ltd’s (STE) 2-year average of 17x. 

• We maintain FY12F-FY13F earnings which incorporate contributions from the group’s RM9bil littoral combat ship (LCS) contract. BHIC’s FY11 net profit of RM13mil (-82% YoY) was above our forecast of RM9mil, largely due  to a positive tax charge of RM12mil. But the group declared a final dividend of 6 sen/share, which is 0.5 sen/share less than the previous year’s and our forecast. 

• Despite a 4% revenue increase, BHIC registered a 4QFY11 pre-tax loss of RM14mil largely due to provisions for the group’s 21%-owned Boustead Naval Shipyard and cost overruns coupled with late delivery charges for two accommodation crane barges, which are expected to be delivered  in March-June 2012 to Swire Pacific Offshore Operations. But a deferred tax write-back of RM12mil and a RM3mil overprovision of tax resulted in a net profit of RM4mil.

• In our view, BHIC is perched on an inflection point in a fresh multi-year earnings growth trajectory. This stems from:-

(1) Starting with a fresh slate in FY12F onwards with cost overruns and late delivery charges from the group’s commercial projects mostly provided for in FY11.

(2) Massive gross order book of over RM10bil, with an estimated net order book of RM3.6bil – 4x FY12F revenue. Most of this stems from the Gen2 LCV, which is expected to be delivered in 2017-2019. 

(3) Improved margin prospects driven by enhanced delivery capability from a transformed Boustead Naval Shipyard, which had streamlined operations last year.

(4) Unabated multi-billion new order pipeline such as two patrol vessels worth RM1bil for the Malaysian Maritime Enforcement Agency, a Multi-Purpose Support Ship worth up to RM2bil to replace the damaged landing craft KD Inderapura and new maintenance contract for the first patrol vessels – KD Kedah and KD Pahang –which were commissioned in 2006.

(5) Potential award of a lucrative risk-sharing contract by Petronas for a marginal field together with a foreign operator by the middle of the year.

• The stock currently trades at an attractive FY12F PE of 9x – almost half the valuation of STE, which is a bargain for the sole military yard in the country with massive order book prospects.  

Source: AmeSecurities