Boustead Heavy Industries - Secures subcontracts from Gen2 patrol vessel contract Buy

Investment Highlights

- 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 revised sum-of-parts (SOP) value of RM6.12/share. Our fair value implies an FY12F PE of 11x – a 35% discount to Singapore Technologies Engineering Ltd’s (STE) 2-year average of 17x. 

- BHIC’s 51%-owned Contraves Advanced Devices Sdn Bhd (CAD) was awarded 10-year contracts worth up to RM1.5bil by the group’s 21%-owned  Boustead Naval Shipyard Sdn Bhd (BNS) to undertake engineering, procurement and integration works encompassing the DCNS SETIS Combat Management System and the Rheinmetall Fire Control System. This will be incorporated into BNS’ RM9bil contract to build six second generation of patrol vessels called littoral combat ships (LCS). 

- This is not a surprise as our earlier reports highlighted that BNS could be subcontracting jobs worth up to 30% of the LCS contract value to the BHIC group. As the CAD contract only translates into 17% of the LCS contract value, we expect additional jobs to be awarded from BNS to BHIC group level. 

- Hence, we maintain FY12F-FY13F earnings which incorporate contributions from the group’s RM9bil LCS contract and a fabrication EBIT margin of 12%.

- 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 late delivery charges from the group’s commercial projects mostly provided for by 4QFY11.

(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 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.

- Additionally, we expect fresh excitement from the possibility of BHIC being awarded a lucrative risk-sharing contract (RSC) 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 7x – half the valuation of STE, which is a bargain for the sole military yard in the country with massive order book prospects.  

Source: OSK188