Boustead Heavy Industries - 2012 watershed for new beginnings Hold

- We maintain our HOLD call on Boustead Heavy Industries Corp (BHIC), with a reinstated sum-of-parts-based fair value of RM2.90/share. Our fair value implies a rolledforward FY13F PE of 15x – a 15% discount to Singapore Technologies Engineering Ltd’s (STE) 18x.  

- We have cut our FY12F net profit of RM13mil to a loss of RM52mil due to further expected cost overruns and late delivery charges from the group’s commercial projects.

- For the upcoming 3QFY12 results, which will be announced on 14 November, we expect further losses due to the continuing delays for the delivery of the final accommodation crane barge to Swire Pacific Offshore Ltd.

- We understand that 4QFY12 could continue to be weak as the vessel will only be delivered by December this year, which could entail continuing cost overruns and late delivery charges. Recall that the first accommodation crane barge was delivered in September this year, a delay of almost two years.

- Sealink International has also cancelled its RM109mil contract to build two oil tankers, due to the delays and more attractive pricing of China-builds. Given that an initial deposit of 20% has already been paid, we expect minimal provision from this contract. 

- But our meeting with management yesterday reaffirms our conviction that 2012 may prove to be a watershed year for the group, which would have cleaned out its loss-making commercial projects and turned to a fresh page for  the only military yard in the country. But for any significant rerating 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 group’s gross order book of around RM10bil translates into a net order book of RM3bil currently, largely stemming from the RM2bil combat management system contract awarded by the group’s 21%-owned BN Shipyard. But further sub-contracts from the new generation littoral combat ships could expand the net order book to RM6bil – 13x FY13F revenue. 

- In the pipeline, there are multiple military and commercial orders which could materialise in 1QFY13. These comprise contracts worth RM1bil for two patrol vessels and RM330mil for 25 additional fast interceptor crafts for the Malaysian Maritime Enforcement Agency.

- The stock currently trades at a fair FY13F PE of 13x – a 28% discount to STE, the leading provider of military PP 12247/06/2013 (032380) equipment, arms and services to Singapore  

Source: Kenanga