Boustead Heavy Industries - Closing 2012 with a heavy loss HOLD

- We maintain our HOLD call on Boustead Heavy Industries Corp (BHIC), with a lower fair value of RM2.20/share (vs. an earlier RM2.90/share), based on a 20% discount to our revised sum-of-parts valuation of RM2.80/share. This implies an FY13F PE of 11x – half of Singapore Technologies Engineering Ltd’s (STE) 21x currently.

- BHIC’s FY12 net loss of RM132mil was worse than our expectations, although we had forewarned in our previous reports of a likely 4QFY12 loss. 

- The losses stemmed largely from an estimated RM50mil late delivery charge for Swire Pacific Offshore Ltd’s final accommodation crane barge, which was eventually delivered last month, coupled with a separate RM30mil impairment for the group’s 3 chemical tankers. 

- Recall that BHIC’s heavy engineering work for anchor handling tug supply vessels, crane barges and chartering services have encountered multiple delays and cost overruns over the past two years. The group is still planning to dispose of the tankers, with one of them currently being chartered to Japan’s Asahi Tankers Co Ltd while the remaining two are essentially on spot charters.

- We reduced FY13F-FY14F net profits slightly by 3%-5% as the group has mostly provided for the potential losses arising from these ventures while BHIC’s military projects are currently profitable. We also introduce FY15F net profit with a growth of 20% as the progress of the group’s RM9bil Littoral Combat Ships (LCS) contract should be well underway.

- BHIC’s 4QFY12 loss widened to RM73mil from RM27mil in 3QFY12 despite a 16% increase in revenue to RM214mil. This stemmed mainly from late delivery charges for the Swire accommodation crane barge and impairment provisions for the 3 chemical tankers, but partly offset by a manufacturing EBIT of RM12mil. 

- We retain our conviction that 2012 was a watershed year for the group, which has cleaned out its loss-making commercial projects and turned to a fresh page for the only military yard in the country with a gross and net order book of RM10bil and RM3bil, respectively.

- But for any significant re-rating on the stock to materialise, BHIC will need to demonstrate a sustainable earnings turnaround, coupled with a consistent execution record for timely delivery of projects. 

- The stock currently trades at a fair FY13F PE of 10x – within its range of 8x-16x.    

Source: AmeSecurities