Boustead Heavy Industries - Supplemental contracts to Gen2 LCS Hold

- 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 pending a meeting with management next week. 

- BHIC’s 51%-owned Contraves Advanced Devices Sdn Bhd (CAD) has been awarded two supplemental contracts worth up to RM509mil by the group’s 21%-owned  Boustead Naval Shipyard Sdn Bhd (BNS) to procure, engineer, and integrate the DCNS SETIS Combat Management System, a Combined Integrated Communication System and Communications ESM System over a 10-year period.

- These supplemental agreements account for 33% of BNS’ earlier letters of award in April this year to CAD worth up to RM1.5bil to undertake  engineering, procurement and integration works encompassing the DCNS SETIS Combat Management System and the Rheinmetall Fire Control System. These scopes of works are part of BNS’ existing RM9bil contract to build six second generation of patrol vessels called littoral combat ships (LCS).

- As these supplemental agreements do not change the value of the group’s existing order book, we maintain FY12F-FY15F earnings for now. But we are currently reviewing our forecasts given the ongoing soft quarterly earnings performance of the group. Recall that the delay in the delivery of two accommodation crane barges to Swire Pacific Offshore Ltd stems from weak execution capabilities, and was 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 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