BHIC - Secures RM70mil naval maintenance job

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

-  BHIC’s 21%-owned Boustead Naval Shipyard (BNS) has secured a three-year maintenance contract worth RM70mil from the Ministry of Defence Malaysia to supply and deliver spare parts, maintenance services and training for the 23rd Frigate Squadron of the Royal Malaysian Navy.

-  This contract is within expectations as we have already assumed an annual naval maintenance contract of RM150mil for FY12F-FY15F. But we are currently reviewing our forecasts given the ongoing soft quarterly earnings performance of the group. 

-  Recall that the delivery of two accommodation crane barges to Swire Pacific Offshore Ltd could be postponed until 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.

-  Additionally, BNS has been served a RM100mil legal suit by Raja Jaafar Raja Harun and a contractor called Ingat Kawan (M) Sdn Bhd for alleged defamation by one of its former employees. BNS is disputing the claims, which effectively translates into 44% of BHIC’s FY13F earnings.

-  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 10x – which translates into a 44% discount to Singapore Technologies Engineering Ltd’s FY13F PE of 18x. We view the discount as justified given the group’s weak earnings track record.   

Source: AmeSecurities