Thursday 6 September 2012

Boustead Heavy Industries Corporaiton - RM100mil defamation suit from contractor Hold


- 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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