Boustead Heavy Industries Corporation - Continuing commercial losses in 2Q HOLD

- We maintain our HOLD call on Boustead Heavy Industries Corp (BHIC) with an unchanged sum-of-parts based fair value of RM2.90/share which implies a FY13F PE of 15x – a 10% discount to Singapore Technologies Engineering Ltd’s (STE) 2-year average of 17x. 

- BHIC’s 1HFY12 net loss of RM17mil was expected, as forewarned in our report dated 29 June this year. The losses stemmed largely from the absence of any initial contributions from Boustead Naval Shipyard’s (BNS) RM9bil littoral combat ships (LCS) contract, chartering losses and further provisions for Swire Pacific Offshore Ltd’s two accommodation crane barges, which will face a further 3-month delay in delivery to the end of this year. 

- For now, we maintain FY12F-FY14F earnings which already incorporate the additional cost and delays in the Swire accommodation work barge deliveries till the end of the year. These delays for the group’s sole remaining commercial project stem from weak execution capabilities, and were exacerbated by a weak external charter market which led to Swire imposing stringent quality requirements. 

- While BHIC was awarded a RM1.5bil contract from the group’s 21%-owned Boustead Naval Shipyard to undertake engineering and integration work for the six Littoral Combat Ships’ combat management systems in April this year, the initial contributions this year is not expected of significantly reverse losses in the group’s commercial division.

- BHIC’s 2QFY12 loss rose 18% QoQ to RM32mil despite a 36% increase in revenue to RM142mil. This stemmed from: 1) lower contributions from maintenance, repair andoverhaul activities, which tend to enjoy higher margins, and 2) losses from low utilisation arising from thechartering operations of three chemical tankers. Recall that one of the tankers were chartered to Japan’s Asahi Tankers Co Ltd while the other two are essentially on spot charters.

- As the sole military yard in the country with a net order book of RM2.4bil currently, BHIC’s order book prospects are clearly unrivalled among equipment fabricators in the country. But for any significant re-rating on the stock to materialise, the group will need to demonstrate a sustainable earnings turnaround, coupled with a consistent execution record for timely delivery.

- The stock currently trades at a fair FY13F PE of 14x – 18% discount to Singapore Technologies Engineering Ltd’s PP 12247/06/2013 (032380)   current FY13F PE of 17x.  

Source: Kenanga