Boustead Heavy Ind Corp - Further commercial losses but 2Q to rebound 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. 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 1QFY12 net loss of RM15mil came in below expectations, vs. our FY12F net profit of RM107mil  and street estimate’s RM95mil. This stemmed largely from the absence of any initial contributions from Boustead Naval Shipyard’s (BNS) RM9bil littoral combat ships (LCS) contract and additional provisions for Swire Pacific Offshore Ltd’s two accommodation crane barges, which will face a further 3-month delay in delivery to JuneSeptember this year. 

- However, BHIC was awarded a RM1.5bil contract from BNS to undertake engineering and integration work for the LCS’ combat management systems in April this year, with initial contributions expected this quarter. As such, the group’s 2QFY12 earnings are poised for a radical rebound.

- Hence, we maintain FY12F-FY14F earnings which incorporate contributions from the group’s littoral combat ships (LCS) contract and a fabrication EBIT margin of 12%.

- BHIC suffered a net loss of RM15mil largely due to:- 1) absence of contributions from LCS contract, 2) provisions of over RM10mil for the Swire project, and 3) lower maintenance, repair, overhaul services. This was slightly offset by lower losses from the charter division which has assumed ownership of three chemical tankers.

- Currently, one of the chemical tankers has been chartered to Japan’s Asahi Tanker Co Ltd, while the other two are on spot charters. The second vessel will be chartered to Vitol Group and the third is under negotiation with Asahi and Vitol. BHIC is also looking at disposing of these vessels at suitable prices.

- Gross order book stands at around RM10bil. But assuming 30% of the Gen2 patrol vessels are sub-contracted to the group’s wholly-owned Boustead Penang Shipyard, BHIC’s net order book stands at RM3.6bil – 6x FY11F revenue.

- 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: AmeSecurities