Wednesday 20 March 2013

Boustead Heavy Industries - Secures RM15mil arms supply contract HOLD


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

- BHCI has secured a RM15mil contract from the Ministry of Defence Malaysia to maintain, repair and supply spare parts for Oerlikon 35mm guns and Skyguard radar to the Malaysian army for 3 years. A formal contract between the government of Malaysia and BHIC will be signed later.

- As this contract is marginal compared to the group’s massive gross and order book of RM10bil and RM3bil respectively, we maintain FY13F-FY15F earnings.

- Looking forward, we expect the group’s earnings to continue to be underpinned by the group’s military contracts, the bulk of which stems from the second generation naval patrol vessel project under littoral combat ships (LCS) programme. Currently, we estimate that BNS to-date has awarded 25% of the LCS contract value to BHIC’s subsidiaries, which will enable the group to consolidate the revenues of the subcontracted works.

- In the pipeline, there are multiple military and commercial orders which could materialise this year. These comprise contracts worth RM1bil for two patrol vessels and RM330mil for 25 additional fast interceptor craft for the Malaysian Maritime Enforcement Agency. While BHIC’s loss-making commercial projects have been mostly delivered to-date, we understand that the group is still open to non-military-based projects given the country’s huge oil and gas development prospects.

- We retain our conviction that 2012 was a watershed year for the group, which has mostly cleaned out its loss-making commercial projects and turned to a fresh page for the only military yard in the country with a huge outstanding order book. But for any significant rerating 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 – against the stock’s historical range of 8x-16x.

Source: AmeSecurities

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