- We
maintain our HOLD call on Boustead Heavy Industries Corp (BHIC), but place
UNDER REVIEW our sum-of-parts-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.
- BHIC’s
21%-owned Boustead Naval Shipyard (BNS) has been served a RM100mil legal suit by
Raja Jaafar Raja Harun and Ingat Kawan (M) Sdn Bhd. We understand that Ingat
Kawan was BNS’s contractor engaged to remove underground cables last year.
- Under
suit, the plaintiffs are claiming general damages against BNS and BNS’ head of warehouse,
logistics and materials handling department Md Yusoff Biran arising from an alleged
defamation by the defendants.
- BNS is
disputing the above claims, which effectively translates into 44% of BHIC’s
FY13F earnings. But management is of the view that BNS has a good defence to
the suit, which has been fixed for case management on 14 September 2012.
- 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.
- 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 11x – which translates to a 39% 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
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